By GREG DAUGHERTY
Feb. 6, 2023
One of the most important, but easily neglected, steps in preparing for retirement is communicating your plans to other people who will be affected by them. In particular, if you have children, you may want to share certain financial and other information—for both their benefit and yours.
How much detail you choose to provide can depend on how close you and your kids are. If you have one or more children who are up to the task, you may also want to give them the legal authority to make financial and medical decisions on your behalf, should you ever become unable to. A good time to do that is before you retire, as part of the planning process. However, if you’re already retired and haven’t yet done this, then the sooner, the better.
It makes sense to take charge of your future and make your plans and feelings known while you’re very much in control of your life, before health or other issues make that more difficult. This article provides a checklist of topics to help facilitate that conversation.
- Your retirement plans don’t affect just you; they also have an impact on your children.
- As you get ready to retire, you may want to share certain financial and other information with your kids.
- You may also want to give one or more of them the authority to make financial and medical decisions on your behalf should you become impaired someday.
- Among the financial matters that can be important to discuss: your home, your debts, your investment assets, your insurance, and any business that you own.
For many people, retirement is a time for downsizing to a smaller home. Your current abode may be larger than you need, too costly to maintain, subject to crushing property taxes, or otherwise impractical for your new life. You may also yearn to move to another part of the country or to another country altogether. Or you might be considering a continuing care retirement community—if not right away, then in a few years.
This is both an emotional and a practical matter. On the emotional side, you and your kids may be attached to the old place and reluctant to part with it. On the practical side, one of them might have dreams of owning it themselves someday. Perhaps you even have an adult child who’s currently living with you. If nothing else, the kids may still be storing possessions in your home that they’ll need to move elsewhere.
Ultimately, of course, it’s your home and your decision. Your home may be the most valuable asset you possess, and you may need the equity you’ve built up in it over the years to fund a comfortable retirement for yourself. If you’re in the enviable—and unusual—position of not needing that equity, then giving the home to a child can be an option. Bear in mind, however, that if they receive the home as a gift while you’re living, then they won’t benefit from the same step-up in cost basis that they would if they inherited it after your death.1 As a consequence, they could face a big tax bill if they later sell the home.
If you wish to, you can also sell your home to a child—although, if they pay less than the home’s market value, the difference is considered a gift of equity.2,3
Either giving the home away outright or selling it at a substantial discount can trigger gift taxes—which you, not the child, would have to pay.4 However, in 2023, you’re allowed a lifetime limit of $12.92 million on gifts and inheritances combined (twice that for married couples), so you may be able to avoid gift taxes unless you plan to make other substantial gifts and leave a very large inheritance.5
More and more Americans head into retirement these days with mortgage, credit card, or even student loan debt.6 That is your problem, not your kids’, but it’s worth making them aware of it because unless you pay it off before you die, your estate will have to, reducing any inheritance that they may be anticipating.
If they inherit your home and you still have a mortgage on it, that mortgage may not be assumable, so your heirs will have to pay it off, possibly by taking out a new loan on their own.78 Same for any home equity loan or home equity line of credit (HELOC).
If you have a reverse mortgage, your children will need to repay its balance if they wish to keep the home in the family. In fact, if you have to move out of the house for more than 12 months, such as to receive rehabilitative care after an injury, the loan will come due.9
Your Retirement Accounts and Other Financial Assets
Chances are that you’re counting on the money you saved and invested during your working years to supplement your Social Security and pension income (if you’re lucky enough to have a defined-benefit pension). In fact, the Internal Revenue Service (IRS) rules on required minimum distributions (RMDs) mean that you’ll have to withdraw a certain amount of money from your traditional (non-Roth) retirement accounts each year starting at age 73 whether you need to or not (the age was just raised from 72 with passage of the SECURE Act 2.0, part of the Consolidated Appropriations Act of 2023).10 You’ll also have to pay income tax on those withdrawals, further reducing your kids’ potential inheritances.11
Just in case you’re incapacitated at some point or die suddenly, you may want to give your children a list of the financial institutions where your money is held. That can save them a lot of detective work and reduce the possibility of any accounts getting lost.
You can leave whatever money remains in your individual retirement accounts (IRAs) to your kids by designating them as your beneficiaries with the financial institution that serves as the accounts’ custodian. Those designations take precedence over your will and can allow your heirs to receive the money before your will is probated.12 In addition, you might call your beneficiaries’ attention to the rules on inherited IRAs, which also involve required minimum distributions, so they aren’t surprised when the time comes and don’t run afoul of the IRS.
On a more delicate topic, you might also want to discuss how much of that money you hope to leave them someday. Just insert one big caveat: If you live long enough, you could end up spending all or most of it.
Your Life Insurance
As with your investments, it’s wise to tell your children about any insurance policies you have and where they are located. Life insurance, like retirement accounts, becomes payable upon your death to the beneficiary or beneficiaries you’ve chosen.12 It can, among other things, provide cash to cover funeral expenses or pay off outstanding medical bills.
Your Healthcare Plans
You may enter retirement in tip-top shape, but somewhere down the line begin to face one or more serious health issues. Having a child who can drive you to appointments, if necessary, or help you deal with all the paperwork can make life a lot easier.
At that point, if not sooner, you should brief them on the health coverage you have available to pay the bills. If you’re age 65 or older, that is probably Medicare.
As you likely know, but your kids may not, Medicare is the federal health insurance program for most Americans age 65 or older. You can choose an original Medicare plan (Parts A and B) or a private Medicare Advantage plan (Part C). In addition, you have the option to buy Medicare drug coverage (Part D) or a Medicare supplement plan (Medigap) to cover some of the costs that original Medicare does not.131415
It’s worth noting—and informing your kids—that while Medicare covers many things, it will pay for nursing home care or nonmedical home care only in extremely rare instances.16 A private long-term care (LTC) policy, if you have one, may defray some or most of those costs. If you do have an LTC policy, also tell your kids where you keep it or make a copy for them. If you become disabled, they may have to file the papers that trigger LTC payments from the insurance company.
If you end up largely depleting your assets during your retirement years, you may become eligible for Medicaid, the federal and state health insurance program for low-income Americans.17 It provides more coverage for long-term care than Medicare does.18 Even without becoming impoverished, retirees can sometimes make themselves Medicaid eligible by establishing trusts, strategically spending down their assets, making gifts, and other means. If you have any such plans in mind, let your kids know.
If You Become Incapacitated
At some point, you or your spouse might become physically or cognitively incapacitated.
As a precautionary measure, you could give one or more of your children the authority to make medical or financial decisions on your behalf, through a power of attorney, healthcare power of attorney, or similar legal documents. Because events can move quickly in these situations, it’s smart to prepare the papers—and your kids—well in advance.
Part of that is making sure that your kids understand your preferences: Would you be comfortable moving into an assisted living facility or a nursing home (and do you have a particular one picked out)? Or would you rather stay in your own home with the help of an aide, if that’s possible? Depending on the severity of your condition, they may not be able to honor your wishes, but you will at least have made them known.
If you don’t have a last will and testament (and a surprising percentage of Americans do not), you should make one.19 If you have a will that was drafted years ago, it could be time to revisit and revise it.
You don’t have to share the contents of your will with your kids, but there are some good reasons why you might want to. One is if you’re splitting your estate unevenly. There’s nothing wrong with leaving your underpaid schoolteacher son a greater share than your set-for-life investment-banker daughter, but you’ll avoid hurt feelings if you explain yourself while you still can. Similarly, if you have a child who is unable to care for themself, you’ll want to make appropriate provisions for them and let their siblings know about it. If you’re making substantial charitable bequests that would otherwise go to your kids, that’s also worth discussing.
Finally, not to be unduly grim about it, you’ll also do your kids a favor if you write out instructions on how you want your funeral, burial, or other final arrangements to be handled. Be sure to include information on whatever financial resources you may be providing to cover the costs.
Median cost of a funeral with viewing and burial in 2021, according to the National Funeral Directors Association. That figure doesn’t include cemetery costs.20
Any Business That You Own
If you have a business, you may intend to sell it, either to fund your retirement or because none of your kids is interested in taking it over from you. Whatever you expect to do, you’ll want to discuss it with your children well beforehand and put a plan in place as soon as possible. Both selling a business and succession planning are complex topics and beyond the scope of this article.
How long is the average retirement?
That depends, of course, on when people retire. Suppose you plan to retire at age 65. The average life expectancy of an American man at age 65 is another 18.09 years, while for women, it’s 20.70 years, according to the Social Security Administration.21 However, with increasing numbers of people living past age 100 these days, retirement can often last for 30 or more years. For financial planning purposes, it’s usually best to err on the optimistic side and assume that you’ll be retired—and that your money will need to support you—for at least two decades and possibly longer.
Can you give your house to your child but still continue to live in it?
Yes. One way to do that is to put the home in a qualified personal residence trust (QPRT) and name your child as the trust’s beneficiary.22
Can you have multiple beneficiaries on a life insurance policy?
Yes, you can usually have as many as you’d like. For example, you might split the policy’s proceeds among your children, allocating a specific percentage to each of them.
What happens to a traditional pension after you die?
If you’ve elected joint-and-survivor (also known as joint-life) payouts, your survivor will continue to receive money after you die. That person will typically be your spouse if you have one, but it can also be a child, other relative, or nonrelative.
The Bottom Line
If you plan to retire soon (or already have), consider briefing your children on your finances, including how you expect to pay for costly healthcare should you need it. How much you divulge is up to you, but you can head off some unpleasant surprises, ill feelings, and sibling squabbles if they at least have the big picture. You may also be helping them prepare for their own retirements someday.
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- Tax Foundation. “Step-Up in Basis.”
- Internal Revenue Service. “Frequently Asked Questions: Gifts & Inheritances 1.”
- Fannie Mae. “Selling Guide: B3-4.3-05, Gifts of Equity (10/07/2020).”
- internal Revenue Service. “Frequently Asked Questions on Gift Taxes,” select “Who pays the gift tax?”
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2023.”
- U.S. Government Accountability Office. “Retirement Security: Debt Increased for Older Americans Over Time, but the Implications Vary by Debt Type.”
- Consumer Financial Protection Bureau. “I Recently Inherited a House. The Mortgage Lender Said It’s Required to Determine My ‘Ability to Repay’ Before It Will Let Me Take Over the Mortgage Loan. Is This True?”
- Cornell Law School, Legal Information Institute. “Assumable Mortgage.”
- Consumer Financial Protection Bureau. “When Do I Have to Pay Back a Reverse Mortgage Loan?”
- Congress.gov, U.S. Congress. “H.R.2617—Consolidated Appropriations Act, 2023: Text,” Division T, Section 107.
- Internal Revenue Service. “Retirement Topics—Required Minimum Distributions (RMDs).”
- American Bar Association. “The Probate Process.”
- Medicare.gov. “What’s Medicare?”
- Medicare.gov. “How Do Medicare Advantage Plans Work?”
- Medicare.gov. “What’s Medicare Supplement Insurance (Medigap)?”
- Medicare.gov. “How Can I Pay for Nursing Home Care?”
- Medicaid.gov. “Medicaid Eligibility.”
- Medicaid.gov. “Long Term Services & Supports.”
- Gallup News. “How Many Americans Have a Will?”
- National Funeral Directors Association. “2021 NFDA General Price List Study Shows Funeral Costs Not Rising as Fast as Rate of Inflation.”
- Social Security Administration. “Actuarial Life Table.”
- Cornell Law School, Legal Information Institute. “Qualified Personal Residence Trust (QPRT).”