Spending The Kids' Inheritance |
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 An older couple climbs into a sleek black sedan and starts down a tree-lined boulevard in Fort Lauderdale. Bound for a day at the beach, they wear their devil-may-care philosophy on their bumper sticker:
"We're spending our kids' inheritance."
The thought behind this slogan strikes many people as humorous and playful and others as insensitive and self-centered. But more and more ThirdAgers are adopting the philosophy--for very sound financial reasons.
Take Patrick Logsdon, 60, a former glassworks craftsman turned union executive who plans to retire in two years. Logsdon has a financial plan that will give him the freedom to relax and play golf at the Maplehurst Country Club ("a working man's country club") near his home in Frostburg, Maryland. He doesn't plan to cut corners to leave a large financial legacy for his grown children, although "they'll be taken care of by [his] life insurance."
"Ninety-eight percent of the people facing retirement will not be able to leave money to their kids," says Logsdon. "People need to prepare for retirement as best they can and then live it."
Experts agree.
J. Michael Martin, a certified financial planner and president of Financial Advantage, Inc., in Columbia, Maryland, says more and more people are making a point of spending their money while they are still alive to enjoy it. Leaving a legacy is a primary goal for only about 10 percent of his middle and upper-middle-class clientele. A growing number of estate planners even counsel older people against designing an estate plan for the express purpose of leaving an inheritance. These experts warn that longer life spans and steady inflation force most people to use their assets during their lifetime.
"Mentally, most folks would like to leave something for the kids," says Certified Financial Planner Jim Pearman, a principal with Fee-Only Financial Planning in Roanoke, Virginia. "But they often don't realize what impact even moderate inflation can have on a nest egg."
 For example, a retired couple might need $30,000 a year to live now. But at 4 percent inflation, the couple would require $80,100 a year to match that purchasing power in 25 years.
"They need to maintain their assets and to continue to grow those assets," Pearman adds. "Perhaps when they die, or if their investments do better than expected, then there will be something left for the kids."
Most financial planners suggest making provisions for resources to last 25 or 30 years in retirement. They also stress that protection against bankrupting health costs could save the children from being saddled with debt down the road. One strategy includes investing for growth as a hedge against inflation, minimizing estate taxes, insuring against long-term health care costs, and giving money to children and grandchildren as needs arise rather than at death.
 Tips from the pros
Financial counselors and estate planners offer advice for people pondering inheritance in the modern world. Here are key tips:
Minimize estate taxes
Currently in 1999, estates of $650,000 or more are subject to estate taxes starting at 37 percent and rising as high as 55 percent. A couple with a house, a car or two, an insurance policy, and retirement investments can face this tax without even realizing it. Certain perfectly legal steps can be taken to minimize estate taxes. For example, a husband can transfer the first $650,000 of his estate to his wife by placing it in a "bypass" trust for her benefit. There is no tax on the transfer of assets to a spouse, whether in life, by gift, or at death. Everyone has one lifetime $650,000 estate tax exemption. By using two exemptions, a married couple can pass $1.2 million worth of property to their children, tax-free. Thus, the couple can enjoy the wealth during their lifetime.
Give now
 Many middle-income seniors give money to their children and grandchildren during their lifetime. They don't think of that as leaving an inheritance, but as helping out. Yet there are real tax benefits to this approach. Current tax laws permits individuals to give up to $10,000 per recipient per year ($20,000 if making a joint gift with a spouse) without tax consequences. Gifting has two benefits. First, the recipient gets to enjoy the gift while the donor is still alive. Second, the money has been transferred out of the donor's estate, which, depending on its size, may be subject to steep federal estate taxes after death. Each donor can give $10,000 to any number of recipients each year. And each donor can save as much as $5,500 in estate taxes each time a gift of $10,000 is made.
Get long-term care insurance
Many experts encourage clients to consider long-term care insurance to protect against the cost of extended nursing home or home health care, which can bankrupt an estate. Due to escalating medical costs, a serious illness can quickly wipe out a lifetime of savings, and government assistance programs go only so far. Medicare pays for up to 100 days of nursing home care, and Medicaid benefits are available only to the poor. If you were planning to transfer assets out of your estate to qualify for Medicaid, think again: the Kassebaum-Kennedy bill, which was passed by Congress in 1996, makes this practice illegal in some cases.
Under a long-term care policy, you receive a daily benefit to cover the cost of a nursing home stay or skilled or custodial care in your home. The key to purchasing long-term insurance is buying it when you're young enough to afford the premiums and healthy enough to qualify for coverage. The coverage is suggested for people seeking quality care and seeking to protect their assets. These folks may find that protecting their children against debt is the best possible legacy of all.
I'm spending my kids' inheritance! Are you? Share your story with other ThirdAgers in Discussions.
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