Jim's Take
Jim's Take
Estate Planning Part 2: Young Couple
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This is the second episode in a four-part series. Jim and Tyler discuss what a couple in their 20s or 30s estate plan could look like. Jim and Tyler go over key concepts regarding beneficiary designation and guardianship.
Welcome to Jim's Take. I'm your host and we will continue our estate planning segment.
Speaker 2I'm your cohost, Tyler Kennedy, and I figured we'd start with the , the next group that will actually benefit me a little bit, but , uh, the young couple. Do you wanna share any stories of young couples?
Speaker 1Maybe we can start Tyler by acknowledging that for most young couples, the state planning will be seen as a chore. Something that we have to do now that we're grownups, which of course is true. They have chosen to become grownups, they've gotten married frequently. What is motivating to young couples is that they find that they're expecting and that they're about to become a family. And so, and that should be motivating. So their , their reactions are correct. <laugh> on this , uh, I , I would recommend to a young couple because there are many things that can go wrong and I don't wanna , I don't wanna start talk , talking about all the bad things can happen, but we are talking about estate planning, so we do have to talk about bad things that might happen, but maybe we can make this positive and maybe we can discuss some good things that could happen to this young couple on the way to addressing the bad things that might happen. Statistically don't happen often, but they should be planned for. So what one of the ways we would recommend to a young couple, to a couple that might be the children of an existing client, one of the things we might recommend to them is that they start through estate planning by deciding what, what do you want to do with your life? What do you want your life to look like? Certainly we're talking about what do you want your life to look like when one of you is gone? But where we're going is what do you want your life to look like? And we're talking about financially if you're both alive. So that's, that's the fun part of this process. But in order to do that, we have to fund it. We have to come up with this , a mechanism to make what you want happen . Make it happen is somebody's gone. And so let me be specific. Do you want your, something should happen to you? Do you want your spouse to live in a house that we're currently living ? Do you want your spouse to work? Must they work? Will you stay in that town when your children are ready for school? Uh , lots of young couples live in places that are fun. Uh, may be expensive. New York City, Hoboken, Jersey City are all fun places for young people to live in this area. None of those places would our children , what our clients or our clients' children want their children to go to school there. So these kind of things can be discussed. Uh , you don't have to decide, but you can discuss what you'd want to do. If you were to stay in New York City, then all of a sudden we have to start thinking about paying for private school. That kind of thing can be decided down the road. Do you want own a second house? Well, that can be fun to discuss at the very least. Uh , certainly sounds expensive.
Speaker 2Yeah. It doesn't have to all be doom and gloom.
Speaker 1No, it doesn't. And maybe that's the direction that we can go with , with these young couples . But it is important that there be , that there be planning and that it take place frequently. The a child and expecting a child is what motivates this whole process
Speaker 2Just to make sure that it's all in place. God forbid
Speaker 1It has to be in place because , uh, once mom is expecting the kid is coming with or without dad, and we happen to be doing this a right on the eve of a September 11th, and we all know somebody who left behind and expecting spouse. We , we don't want bad things to happen, but they do.
Speaker 2It's unfortunate, but it does. What should the goal be for the young couple?
Speaker 1What we've discussed so far? What do you want your life to look like? Uh , that's something that the young couple can, can probably discuss themselves, can certainly discuss with the financial planner. Life insurance people have these conversations all the time. So , uh, you could even discuss it with your friends, but you have to make the decisions yourself. So this is the kind of conversation that we do have frequently, it's part of a retirement plan conversation that these conversation gets serious, but that can happen first. The second step and the documents that must be put in place, and the other person you can discuss this with is your lawyer. The lawyer will be the one who drafts the documents that implements many of these strategies. The life insurance agent will be the one that places the life insurance, which will fund your ideas and your plans. Because frankly, we're dealing, the people we're talking about don't have any money. They have a job, they've got a future, they've got each other, and they don't have any money yet . That's right. They're working on it. We
Speaker 2Sort of broke it down in three areas for them to sort of tackle or at least attempt for them to tackle in their state plan.
Speaker 1Yes.
Speaker 2Do you want to mention sort of the, what the will would be used for in terms of guardianship?
Speaker 1One of the issues that comes up early, and this really is the, the big disaster, the joint disaster. Something happens to mom and dad who's gonna take care of our kids. For many couples, this is an easy decision. They can see that, you know, one set of parents is either local, more inclined, better suited to raise the children for a while . Unfortunately, the, the parents may be willing, but the parents are also older. So, so parents can be a step in this process. Brothers and sisters are probably better steps in this process. Better answers. Local is important of similar outlook and values towards child raising is even more important. And all of us who have brothers and sisters, you can see that people, we all , we all raise in the same family and yet we all raise our children differently. That's common. Uh , so picking a guardian is important cuz what you really wanna avoid is a dispute. Uh , you don't want two people fighting over your kid. That's, that's not healthy for them. It's not healthy for your child. Your child is not just lost their parents. They're going to need uncles, aunts, grandparents. We don't want anybody fighting. So that's important. So you can select a guardian. The courts will honor your selection. Uh , the think you had, put some thought into it, which you did. You can also, if you can't come up with a guardian, if you , if the two of you don't agree, you can put in a mechanism where the executor is going to make that decision as to guardianship. If you , if you can decide on the executive ship . So coming up with a will is important because you can for a young couple, because you can name a guardian if there are some assets or will be some assets. The will is important that those assets be held properly for your children. We can all see the potential problem of a child turning 18 and suddenly having access to an inheritance. It would not have been healthy for us to suddenly have access to money. By the way, no parents to guide us and we get access to money at 18. It's, it's a bad formula. We can all see where that's a bad formula. We can try to minimize that problem through the estate planning process in the documents and we'd set up trusts and wills to control access to funds.
Speaker 2Just to clarify, there, the executor is appointed by your will and then in your will it states who you would want guardianship. So you have to do the will, right?
Speaker 1Yes. Your will is actually a statement of intent. This is what you'd like to have happen. The person appointing the executor is the probate judge in our area, it's Bergen County. Every county has one. So technically the probate court appoints your executor as executor , uh, will follow your intention as long as the executor has to accept the job. That's the biggest <laugh> .
Speaker 2That's true. Yeah.
Speaker 1The biggest step, Jim, can
Speaker 3You clarify guardian, executor and
Speaker 1Beneficiary. Guardian is a person who's in charge of your people. Executor is the person who's in charge of your property. Your beneficiary is the one that you're giving it to. And in our young couple situation, many, many people would pick all two spouse and known euphemistically as an i love you will achieves the goals.
Speaker 2Okay, so I think we've covered everything in terms of the guardianship. The next part that we wanted to focus on was how much in life insurance do they need?
Speaker 1That's always a tough question. Let's work, we like to see it come up with it as something whereby you first , uh, analyze how much income they'll need to maintain their standard living going forward without the person who's going to be insured. So that is a fairly difficult mathematical equation and in fact, professionals would even disagree on what that number is. I, I know what my opinion is on how the money would be invested and it's very close to what we do for retirement planning because not only do you have to replace income, you need a raise , you need, there's inflation , uh, markets fluctuates. So you need some room for the market fluctuation because the bills keep coming at a very steady pace. So that's item one is replacing income. There's also other things that are expensive. I recently saw a report that it costs $300,000 to raise someone to 18. I can't tell you the source of that report. Wall Street Journal was the Wall Street Journal reported it and i I maybe it was their source, maybe they did the report. So it was published in the Wall Street Journal. It said 300,000 up to 18. Uh , at 18. It's notable that there's a very large expense that's going to continue and our clients frequently send their kids not only to college, but to expensive private colleges and 300 to 350,000 after taxes for college would be a number That's, you know, suddenly the expense arrives. Uh , we can schedule it. So, so we've got our 300,000 and now we just added 350,000 more get married. Would our clients like to help their children with a down payment on a house? I don't know that's choice. But you can see this number. And by the way, that 300,000 is a national number.
Speaker 2Yeah, it's is , it's an average. It is expensive on
Speaker 1The coast . So should we increase that number by 50%? I mean we , we can start creeping to a million dollars pretty quickly.
Speaker 2Yeah, it depends which private school and how many kids <laugh> .
Speaker 1Well then we , but then we can , we can also address other children that's in addition to the cost of, of health, shelter, food, diapers, daycare , sports teams lessons. God forbid they have one of the expensive hobbies, ice hockey horses and they could become a theater or art person. The sky's the limit, all of which are ancillary expenses. So if you wanted me to, to use round numbers , uh, because you also have to support the spouse. A decisions has to be made whether the surviving spouse will continue working. If so, we have to adjust all of our numbers for that. There could be seen that there'll be a period of time until the kids are school before surviving spouse. All of these decisions have should be discussed and thought through. And we will work on a number, but we , we like people to come up with an amount that they'll need and lump sum that they'll need. And one of the factors that goes into calculating that lump sum is that we think that a client can invest money and take 5% per year out of that lump sum and still have some money for inflation, still have some money for the ups and downs of the market. So if you can take 5% outta your pot of money, that means you need 20 times income to use round numbers. If you need a hundred thousand dollars a year, $2 million of life insurance proceeds should, could, we hope, and we plan that it would generate a hundred thousand dollars a year of income. Of course that's before taxes. So you have to think the tax thing through. So the the , the calculation is hard.
Speaker 2It's very individualized because we don't know their goals. So it will change depending on whether they spouse will keep working or not keep working. So it , it will change depending on the family.
Speaker 1It it will change depending on the family. You're a hundred percent right. So that's all the bad news is that it's an , it's a , it's a difficult calculation. The good news is that life insurance is really, really inexpensive for our young couple.
Speaker 2That leads us into the next part. Do you wanna sort of break down as they might start to go hunting for life insurance? You wanna just give it like a brief overview of universal whole life variable and term? We could just say like the definitions, we don't have to go all the way in, but just so they have an understanding of what they're looking at.
Speaker 1You can start with term, which is easiest to explain. You can pick a term of years and you can buy an insurance policy that covers you for that term. The longest I've seen is 30 years, which is a convenient number because it probably gets our young couple. It gets their children to be born and to be born off and on their own with this fund of money. The surviving spouse can make whatever they, they have plenty of time to make whatever decisions they wanna make and maybe they even get close to social security or retirement age anyway. So it's not a bad number. So we , we could start there. Pick a term of years. Uh , you'll be surprised at how inexpensive life insurance is for our 30 year old couple. So that's the good news is that we're really not talking about much money. If you pick shorter periods of time, the costs go down. Term insurance is, is simply paying a premium for coverage for an event that might happen during this period of time. It's the easiest to understand. All of the other types of insurance have an savings component attached to them. That savings component might be in , as in the case of a whole life policy, you give the insurance company in amount that is far in excess of what the term rate would be and essentially the additional amount is saved. It becomes part of the insurance company's assets. They typically invest very conservatively. Lots and lots of bonds are owned by the insurance company and it's a spread product. So they credit something less than they earn to the cash value in the policy. Very little fluctuation in value. So it has a, it looks a lot like a savings account attached to term insurance policy. Second is that you can have a universal policy which accounts for the ups and downs in life in that you can make larger or smaller contributions to it. So it's, it is much more flexible in that respect. Of course, if you don't give the insurance company the money, they don't have it and it can't build up for you. The insurance company typically credits you an interest rate on it , generous, competitive one, and the money grows. And that's how the universal component works. You can see the cost of the insurance. The term cost come out of the policy and the policy cash values grow. Again, you're dealing with a lower fluctuation product because you're mostly dealing with interest rates, bonds, types of investments that the insurance companies making . A variable life policy can be seen as a term insurance policy with mutual funds attached the mutual funds and they're not mutual funds. Insurance company specific term that's used such as sub-accounts, but basically invest in equities. You get full market fluctuation of your values. You expect as in any equity product, higher returns and you expect greater fluctuation in the cash values as the trade off . You can pick the investment vehicles that you're going to invest in whole life, universal life and variable life. The premiums are higher because more is going into this savings element
Speaker 2And they don't have a specific nd
Speaker 1You , you'll be able to keep it forever in , in theory as
Speaker 2Long as you keep paying your premiums.
Speaker 1The reality is that particularly universal and variable is that the term cost does get older and older. And our experience has been that somewhere in the late seventies, these client, the clients, the policies start to get too expensive to carry and clients make decisions to terminate, to stop paying premise or to sell them off at some point later in their life. So that's been our experience with Universal and with variable life , uh, whole life policies. They're designed for you to take them. They , they don't run out and they're designed to someday pay the death benefit. I would say that this is something that should be analyzed. Clients receive these, these analysis all the time from life insurance agents. We're happy to go over this analysis with them. We almost always have had an opinion that we can give to the clients, the savings. Uh , we have to acknowledge that the savings component works. Clients come back 20 years later and they haven't touched their whole life policy and they've been paying the premiums people, people just, it works. The savings component works. Would they have had more if they'd done something else? That is a great conversation that we should have had 20 years ago. And so we would have that conversation with our clients now for the children of our clients, for these young couples, we're happy to have that conversation now. So
Speaker 2I guess we're, we would be happy if they discuss what they want and then we help them with the life insurance.
Speaker 1Yes, we , we can give them an opinion on the life insurance. We're not life insurance agents. We can guide them as to where to go get it. We are in the investment business, so we have a, a conflict in that if they invest with us, we collect our fee. If they invest with the insurance company, we don't. At least that's how the law, I mean that's how, that's more of a technology issue right now, but right now we , we don't, So we have a, a bit of a conflict there, but we'll give them our opinion.
Speaker 2Well , we're definitely would recommend it though to get the life insurance.
Speaker 1Absolutely. We recommend they get the life insurance. It's easy to recommend that they get a little bit too much because it's so inexpensive.
Speaker 2The last thing I have just to discuss, the, the importance of the beneficiary designation good with the life insurance, with possibly the beginning of their 401k. Things that they may not realize that would be included in the will.
Speaker 1Yes. Well they, they , they may not have re these co young couple may not have realized that they've already started some estate planning and somewhere in the forms when they've completed their 401K plan, they , uh, completed a beneficiary designation frequently. They don't remember exactly who that is. The so, so let's get that straightened out. By the way, the beneficiary of the 401k, if you ever, if the young couple ever left a job, received a distribution, moved it into an IRA account that's got a beneficiary designation as well and the beneficiary designation will control the will does not control who gets your retirement plan asset. It has a beneficiary that controls the will only controls assets that are not otherwise spoken for. A young couple that buys a house usually buys the house in joint name upon one of their death. The law says the joint owner owns the property. So that doesn't go through the will does not control that. The will only controls the , the , uh, individual owns personally. And that's why we, we, that's why we spoke about guardianship and executor so much earlier. So we do have beneficiary designations. We should check to see who they are.
Speaker 2Yeah, well in the young couples case, they're , we just want them to establish 'em . Right. You know, they might have just started putting money in the 401k. Yes . They might've just opened up their ira. So just making sure that those documents have been updated for your beneficiary because we've seen as life goes on, you can forget.
Speaker 1Yes.
Speaker 2So we're just trying to get them to establish that.
Speaker 1Yeah. Yeah. We , we , the the young police officer, 22 years old who doesn't change his beneficiary form and next thing you know, he is retiring at 55 and he named his mother when he was 22. Good chance. That's not what he would Yeah , <laugh> . Yeah.
Speaker 2The good thing is it's easy to change.
Speaker 1Good thing is it's easy to change and the change the , the beneficiary when you complete your beneficiary change. You , you might be surprised to find that the 401K people , uh, whoever's handling your 401K plan, doesn't want the form, may not even keep track of beneficiaries. So that goes into your estate planning documents with you or will and trust.
Speaker 2That is a good point because they're not
Speaker 1Required to, they're not required to. Uh , and, and even, even if they do take the , take the information and keep it as part of your records that you can go online and check, since you can always change it. Your most recent beneficiary, you could have an inconsistent beneficiary form, which is to keep in the file. So that's message is check your beneficiary designations reg regularly.
Speaker 2I believe that's all we have for the young couple. Sounds like a lot of work for them.
Speaker 1It it's a lot of work and most young couples will look at it as a chore. I would encourage them to, to use it as an opportunity to think about some of the financial things in life. The good news is that the solution, the life insurance policy solution, again, an unpleasant topic, but it's relatively inex. I mean, of all the expenses they're gonna have, they're gonna be surprised at how inexpensive this one is. That's good news. It can be fun. And where we're going with all of this and what we think is helpful is that if the client can come up with a world and a set of financial goals that make sense, maybe they have also come close as at a first cut on what a retirement plan might look like.
Speaker 2We hope this podcast motivates you to act. And feel free to contact us with any questions in case you're tired of us talking. We offer a newsletter on almost every financial topic. How does it go, Jim? We
Speaker 1Periodically write longer three, four page letters on economic topics a day and try to explain our long term thinking about that topic. Most of our emails try to point out good news. The press handles the bad news well enough. Uh , we try to point out the good news that is all around us and it is a part of our fundamentally optimistic view about economic matters and, and frankly, the world.
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Speaker 1No. No. We, we use our newsletters. We use these podcasts as part of our marketing effort. We want our clients and potential clients to get a feel for who we are, how we think before they contact us. So there's no charge for this. There's no charge for being on the email. They don't receive , uh, telephone calls. They do receive emails and
Speaker 2Possibly a letter from
Speaker 1Us and possibly a letter. We would send them a letter.
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