Financial Planning Tips, Families, Knight Kiplinger

published 30 December 2019

Ryan Ermey: Welcome to Your Money's Worth. Sandy and I are on break this week and hope you're having the happiest of holidays. Today's show is a rebroadcast of one of our most popular episodes featuring our interview with Knight Kiplinger. While much of what we cover on this show is timely, Knight's advice for discussing money with family is timeless, and we think, tremendously wise. Sandy and I will be back with a new episode on January 6, and until then, we hope you'll enjoy our talk with Knight and wish you a happy, happy New Year.

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Knight Kiplinger: Well, it's a great time if you want to ruin your holiday dinner. I had a grandmother who said you should never talk over the dinner table about politics and religion, to which the rest of us said, "Well, what else is there to talk about?" It's a tempting thing to do, because you've got everybody together in one place, including a lot of sons and daughters, nieces and nephews, who live in far-flung places, and they're all together in one place. But instead of using it for a substantive talk about estate planning and money management over eggnog, where people may be in a bit of a haze, use it as an opportunity to introduce the topic, and say, you know, right after the New Year, let's get together and talk about some family money issues. It shouldn't be a taboo. We'll get together.

Knight Kiplinger: Yeah, you could have a conference call, and you make an appointment for everybody to be there, and that way, you can block out a certain amount of time. And you don't have to wrap everything up in the first conversation. You can meet again later and talk about it. But introduce the topic, and make it known to everybody that it's not a taboo. It's very important, and there are ways to talk about it in a useful way.

Knight Kiplinger: Well, here's how I badger my young adult children. The first thing I did a couple of years ago was say, "You all have a will, don't you?" And they say, "A will? I've been thinking about it." And I say, everybody has to have a will. Some single people think they don't need a will, and I remind everybody, you do have a will. It was written for you by your state. And you might not like that. The single person today marrying late or never marrying may have significant assets, might own a home, and have some savings and 401(k)s. In the absence of a will, that single person's money usually goes to the parents upon the single person's death, and then maybe to siblings. And maybe that single person has other ideas in mind and maybe would like to leave some of that money to a favorite charity, to a close friend. And yes, maybe siblings, as well. So everybody needs a will.

Knight Kiplinger: The first thing they should be talking about is life insurance and long-term disability insurance. Long-term disability people don't think about as much, but the risk of an earnings-impairing disability is actually greater than early death. But let's talk life insurance. Term life insurance for a young, healthy man or woman in their 20s, early 30s is very inexpensive. You can go online, and you can put in all sorts of characteristics, and you can get competitive insurance quotes. There's no reason in the world that a family with young kids shouldn't have a million dollars, two million dollars of term life insurance. It's pure protection.

Ryan Ermey: So for someone like me, I'm a little bit younger. I don't have kids. I rent. My financial situation, I've been following the time-tested advice of Kiplinger's Personal Finance magazine for a long time, and so I'm pretty secure. But for somebody who's a little bit earlier on, or for somebody who's got kids who are a little bit earlier on, what are the things that really need to be brought up?

Knight Kiplinger: Exactly. Six months of living expenses in a liquid form. And I say, if you don't have enough, it's because after you pay all those other bills, there's nothing left. Turn that process around. Pay yourself first. An automatic payroll deduction into a savings account. An automatic payroll deduction into a 401(k). An automatic payroll deduction into a mutual fund, brokerage account. Do those, and then live on what's left over. And you might have to look at how much your dining out, your travel, your purchases of the latest consumer electronics, gadgets. All the things that make life fun, but if you fund the important things first, then live on what's left, instead of the other way around.

Knight Kiplinger: Similar advice for the parents of young children about having enough life insurance. Look out 15, 18 years to the beginning of those college expenses. And it's going to be a very big number. Fortunately, every state in America has a 529 savings plan where your money is accumulating tax-deferred and can be used for those expenses. Grandparents, aunts, and uncles can make gifts to the children through the 529 college savings plan. It's a great thing to do, and I know young couples who have established a 529 for their one-month-old new daughter and new son, and it's a great idea. In our family, we have them for all the little ones, and we talk them up every year. You want to give us a gift? Put it into our child's 529 instead.

Knight Kiplinger: Landfills. You know, it's a really good question. Young adult children have a legitimate right to know something about their parents' situation, because someday, they might have an overly large role in the comfort of their parents, the financial situation of their parents. Parents should be willing to share with their young adult children some of the basics of their financial situation. If they own a home, is there a substantial equity in the home, or have the parents been surreptitiously borrowing that equity in second mortgages and a home equity line? Maybe there's no equity in the home. Have the parents been saving over the years for their own retirement? What are the odds that those young adult children will be called upon, later in life, to support mom and dad?

Knight Kiplinger: The parents might tell their kids about how much life insurance they have, and whether it's going to be sufficient to pay off all the estate bills, and maybe leave something to the children. And this is a conversation that begins to edge into estate planning, which is a whole other thing. But when the parents are giving out advice, in this post-holiday family conference, they should also share and it sets a good example of openness and transparency, and it removes that taboo about talking about money.

Sandy Block: Well, and I think in some of the stories we've written more for older adult children, financial planners have suggested that you should ask your parents what their expectations are with respect to their care as they get older. Do they think that they're going to move in with you? Do they think you're going to live near them? I mean, is that something that people should also be talking about?

Knight Kiplinger: Sandy, that is a great topic of discussion, and it might be a shock that these expectations are quite different. In many cultures of the world, for centuries, it's expected that the adult children will support their elderly parents late in life. They'll move in together. They'll be the caregivers and all that. In western society, we've cut that traditional linkage. And now, most senior people want to live independently, want to live on their own. But that's going to cost a lot of money, and what is the family collectively doing to plan for that eventuality?

Knight Kiplinger: Great, great adage. Talk about it early, and then people have some expectation. They have a game plan in place, and they'll learn a lot of interesting things about each other, but the Dutch uncle parental talk about savings, 401(k)s ... You know, never leave your employer's 401(k) match on the table. If you've got to put in 4 or 5 percent to get the most from that match, do what you have to do, and make sure you get that money, as well. And then on top, set up an IRA separate from your employer plan and fund everything to the max.

Knight Kiplinger: A few years ago, I did a Money and Ethics column in our magazine on this topic, and boy, did it generate a lot of controversy, a lot of letters from financial planners, who have real life experience with this. And the issue arises, when among your young adult children, or your older adult children, there are significantly different circumstances in life which might make it reasonable and logical to have variable bequests in your wills. And remember, we're not just talking about bequests and wills, but we're also talking about gifts in lifetime. The assistance that many parents give to their children as young adults and young family household heads.

Knight Kiplinger: Let's think of some of those circumstances. You've got several children. Your son is an elementary school teacher, married, and has three children. Your daughter is single. She's a hedge fund manager in New York and makes a zillion dollars. You have children in various occupations, various levels of income, some are single, some are married. Do you want to treat all of them the same, and divide your estate exactly the same? I posit that there are good reasons for variable bequests and variable gifts in lifetime, depending upon various circumstances. And I haven't mentioned the child who is, what we used to call a n'eer-do-well. That's not a politically correct term these days, but it may be a child with some emotional instability, maybe an addiction problem.

Knight Kiplinger: Things of that sort, do you really want to give the same cash bequests and the same cash gifts to that person? Maybe that's a situation, if you want to give it all equally, to put some in trusts, so that person can't go to Vegas and blow it. But back to the children and different circumstances in life, I think it's okay to make variable bequests and variable gifts as long as you explain it. You can do this in the will. There can be a side letter in a will or a trust explaining this. And it's very important to say, I love you all equally. I have respect for the occupational choices you've made, your family choices. I have great respect for all of that. But because of the different circumstances, I think you would all understand, it's reasonable that your brother, the school teacher with the three kids, has greater needs than your single sister, the hedge fund manager. And make those decisions on that basis, and explain it.

Knight Kiplinger: One financial planner I know says start talking about this in life, not in the will. That's a little tricky, because you're introducing this, and if there's going to be resentment of your choices, you're putting that right out there pretty early. But that's how I justify it. Now, I heard from financial planners who said, "Knight, that's very well-intentioned. But you're opening a can of worms. There's a risk of resentment among the siblings." And one financial planner said, "Remember, a will is a plan for a particular moment in time." Right now, what if your single daughter, the hedge fund manager gets wiped out in a stock market crash, and it ends up she has less than the school teacher with the three kids. Well, that can happen. You do have to revise plans from time to time. You're not writing a will forever. You should always revisit the plans in your will.

Knight Kiplinger: That's a great point, Sandy. It is useful to point out to your children that there is no child offspring right to an inheritance. You can disinherit anybody except your spouse. You cannot, by law, disinherit your spouse. Your estate is going to require that the surviving spouse, get, in most cases, a minimum of 30 percent of your estate. You don't have to leave anything at all to your children, and I hope you've raised them to be grateful for their circumstances in life. There are a lot of parents who think that raising their kids to adulthood, funding their education, funding their music lessons, fostering competency and capabilities in their children is enough. They've done enough, and there isn't any obligation to continue giving their children money thereafter. And that's very valid.

Knight Kiplinger: The crumbs of Warren Buffett's estate would be fine for most people, Bill Gates. And in fact, I've never found a family that left nothing to the children and everything to charity. They usually mean a small percentage. And I get that. In a well-to-do family, leaving two-thirds to charity and one-third to the kids is fine. Now, I also suggest that early in life, you bring your children in on your philanthropic impulses, how you like to give. I know families where the adults have said, "We're leaving a lot of our family estate to charity." We're going to create a donor-advised fund at Fidelity or Vanguard or one of the other big financial service companies or a community foundation. And we'd like to have family meetings where we all sit around and decide where we're going to make our gifts.

Knight Kiplinger: That's true. A good estate planning attorney will make sure that the vehicles you create are tight. Now there are challenges to estates. Here in the Washington area, there have been some very flamboyant estate challenges. Sometimes, a challenge by a family member to the creation of a big foundation, and the gifting of most of the assets to the foundation ... there have been a lot of challenges like that sort, that pit one heir against the other. Some heirs defending the parents' philanthropic impulses, the others trying to break that impulse. It's tricky, but it's all in the writing of the documents.

Ryan Ermey: I think one of my questions is, when you ... getting back to sort of money and ethics is, in a case where you have multiple siblings dealing with elderly parents, is there a consideration, or should there be a consideration of maybe one kid is there being a caregiver, giving their time, giving their ... sometimes their money in order to help care for a parent. Should that factor in to how you're divvying up the estate?

Knight Kiplinger: Ryan, that's a great question, and I think it should factor in. If, late in life, a will is revised and the parents know that over the last decade, an adult child of their who lives nearby rendered enormous assistance, both time and attention and love and maybe some financial assistance in small ways, buying the groceries, that can factor into the disposition of the remaining assets, when the will is revised. Once again, write it in. Explain why it is.

Knight Kiplinger: Siblings who lived far away and were not able to help in that way are often very grateful to the brother or sister who lived nearby and offered that help. They understand it, and they're often very supportive of that sibling getting more in the estate. But I've also seen it the other way around, where they say, "Well, she lived nearby. She could do it. Of course, she should do that, but I still want my exact even share of the assets."

Knight Kiplinger: But start talking about it, and make it part of the regular family conversation. It's not something just to do once every three years in a conference call. Talk about it regularly. Make it natural. Eliminate the taboo. Be conversational. Be loving. And solicit ideas, you know, throw out an idea. What do you think about this? And you'll have a difference of opinions, but you might hear a better idea than your own.

Ryan Ermey: That's it for today's special episode of Your Money's Worth and another huge thanks to Knight Kiplinger for coming on. For show notes and more great Kiplinger content on the topics we discussed on today's show, visit Kiplinger.com/links/podcasts. You can stay connected with us on Twitter, Facebook or by emailing us at podcast@kiplinger.com. And if you like the show, please remember to rate, review, and subscribe to Your Money's Worth wherever you get your podcasts. Thanks for listening.

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Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.