How Legacy Planning is More Than an Estate Plan with Mark Kenney – Ep 047

Matthew Peck: Welcome, everyone, to another edition of SHP Financial’s Retirement Road Map radio show. I’m your host today, Matthew Peck, and I’m joined by a returning guest, Mark Kenney. So, we have two certified financial planners in the room, and actually, although there’s only one certified tax specialist in the room.

Mark Kenney: There is, yeah.

Matthew Peck: Yeah, and who is that, Mark?

Mark Kenney: That is me, yes.

Matthew Peck: A couple of initials after our name here, but certainly, welcome, everyone. Hope you are enjoying your day or listening wherever you get your podcast to the session. But today, we’re going to talk about the fifth world. I mean, it’s interesting, people can prioritize different ones, but we often talk about the five worlds of financial planning, whether that is based on the CFP or the Certified Financial Planning standards or whether it’s here at SHP Financial. We talk in terms of income planning, investment planning, tax planning, health care planning, and then finally, legacy planning.

So, we wanted today to talk about that final world about legacy planning, about all the things that you need to consider when it comes to what happens next and what type of impact that that has on the other worlds because whether you know it or not or think about it or not, legacy planning and how important that is to you is going to have a dramatic impact on how you plan your investments and how you plan your income and what type of tax planning that you do. So, I think that’s what’s so important is understanding how interrelated all of these, all the five worlds are.

And so, today, we’ll really talk about that fifth world of legacy planning. And as I mentioned, very, very happy to bring on Mark Kenney, who is a recurring guest. And so, before we get into legacy planning and some of the sometimes more morbid questions that we ask, Mark, how are you doing while here, of course, while still living? How are you doing, my friend? And how’s everything going?

Mark Kenney: I’m doing great. We’re gearing up for the Christmas holidays here. My kids, being 75, are very excited for Santa. And yeah, just a great time of year to sit back, reflect on the year that’s gone by and, as you restart or enter a new year, you know your goals and challenges and some of the things you want to accomplish in the new year. So, I always like this time of year, this end and the beginning, and how they kind of join together at the very end of December.

Matthew Peck: No, for sure, too. And I’m both, obviously, Catholic and whatnot, so celebrate Christmas and Santa. I have a seven-year-old who’s also very, very excited. But also, for me, too, it’s the whole winter solstice, like literally, the days are going to start getting longer again.

Mark Kenney: It’s very exciting.

Matthew Peck: Yes. I mean, because as soon as daylight savings time happen, that sort of seasonal depression kind of kicks in a little bit.

Mark Kenney: You gain a little bit of light every day. And yeah, it’s depressing. Coming to work, it’s dark, and leaving work, it’s dark. I can see why some people go down to Florida and enjoy that vitamin D.

Matthew Peck: Right, right. No, absolutely. So, that’s part of that, the celebration there, too, this time of year as well, adding some daylight going forward. So good to celebrate. So, as I mentioned, we’re going to talk about legacy planning today, right? And so, legacy planning kind of goes by different names. I think the attorneys will call it estate planning. So, a lot of people are familiar with that term.

But we use the term legacy planning because it’s more than just your estate. We talk in terms of things like significance, in terms of, okay, what happens after you’re all done with everything? What does it mean? So, when you approach legacy planning, I mean, I guess, how do you approach it with like, I mean, do you start off with that conversation when you first meet clients? And how does it work into your overall financial planning when you first meet somebody? And then kind of walk me through the process of where the touchpoints are in regards to building out a full financial plan.

Mark Kenney: Yeah. So, I love talking about legacy planning. And you hit the nail on the head when you said how you feel about legacy affects the other aspects of our road map. Your investment portfolio, your income, the tax situation, that all boils down to how you feel about legacy. So, when I sit with a client, it is the last thing that I bring up, and I often lead with the question of how important is it for you to leave money to your heirs, whether that be children, whether that be charities? And it really brings up a qualitative conversation.

After we’re done talking about numbers and what debt you have and how much you have in your IRA, when you ask that question, you really get to know more of their personality and how they feel about what they’ve grown and how important it is or maybe not important to leave it to someone. And really, you get a feel of their personality and what’s important to them. And based on that, we need that information for when we develop that road map because you get a wide breadth of answers when you ask that question.

Matthew Peck: Like you have, it’s a big scale.

Mark Kenney: It’s a big scale from someone who may say I want a bounce, that last check, right? Leaving money to my kids is not important. Maybe I put them through college. I’ve helped them. I give them gifts to buy their first homes. And then you get on the other end of the spectrum is, listen, I don’t want to spend any of my money. I’m all set. I want to leave as much as I can to my children. And we want to understand their goals and objectives because that’s where our plans are driven by their goals and objectives.

And then to differentiate legacy and estate, legacy is how you feel about it. The estate planning is the legal structure to make sure that your goals and wishes are done correctly, right? So, although you may sit down with the attorney, he may understand how legally it all needs to be done. The qualitative element is that, well, how important is it that it needs to be done and how much do you want to spend in getting this done in the most efficient way?

Matthew Peck: It’s a great sort of to compare and contrast between, as you mentioned, legacy planning and estate planning and not to toot our own horn too much, obviously, but just for the idea of our role, because think of it this way, where we need to have these conversations with our clients before you have a conversation with an attorney, because the attorney is going to ask you similar questions. And so, one of our many roles is to probe a little bit, to find out how you feel about it, because as we said, it’s a big scale. There’s a lot going on. It changes very often, too.

Mark Kenney: Yes, yes.

Matthew Peck: One thing that I always love about how is I’ll have clients that will say, “I want to spend my last penny,” but then once a grandchild comes.

Mark Kenney: It’s funny you say that. Yes.

Matthew Peck: Suddenly, it’s a whole different– now, it’s like, well, I want to make sure they’re taken care of. It’s like, “Oh, it’s funny. Last week, you didn’t feel so well.” And I think, it’ll be so much fun today to talk about the first part of it, the qualitative, the questions that we ask our clients, that our listeners should be asking themselves that if they have a financial planner, we hope that that planner is asking them these questions because once you have it worked out, not that it’s going to be permanent, like I just mentioned, but then you’re just that much better prepared to sit with an attorney to create that legal structure like you were mentioning, Mark.

Mark Kenney: Yeah. And you got to remember before you meet with an attorney, attorney’s going to ask you questions about establishing a trust and who do you want to be the beneficiaries of that trust and, more importantly, who’s going to be the successor trustee, which is the person that comes in and manages that. And you want time to think about that before you’re put on the spot and you have to name someone and, obviously, you can change that. But even that in itself is a difficult decision.

And then when you have estate documents, you’re going to talk about power of attorneys and health care proxies and who do you want to make those decisions? That takes a lot of thought and a lot of trust into who you’re going to name. And again, it’s all going to depend on how you feel and who’s going to get this money when it’s all said and done.

Matthew Peck: So, let’s pick up, though, or let’s go back to that initial question. As you said, as you sit down people, first time we meet them, whether it’s here in our Plymouth office overlooking the water or whether it’s down in Hyannis or Woburn or some of our satellite offices. So, you ask our clients when we first meet someone that comes in, how important is it. Okay, so then we get a wide range of answers.

And then what other questions do you ask? Because for example, when it comes to beneficiaries, I’ll often talk about, “All right, folks, as we talk about this, do we want to make it equal distributions or do you want to make it equitable distributions?” Because one thing that does happen through life, as all of our clients are probably aware of or clients that have kids, is that some do well and some do worse. And it’s no throw, no shade on anybody, but that’s just life.

And so, okay, well, one question that I ask clients as we are building up an understanding, a true legacy plan to then get the estate plan to match it is do you want to make your distributions equal? So, let’s say I have four kids. Do I want to split it up 25% per? Or if my son is doing worse than my daughter, does my son maybe get a higher percentage only because he’s a little bit less well-off than my daughter who maybe married Mark Zuckerberg or Jeff Bezos, who I believe is on the market that I’m aware of, but it’s that point. So, do you ever get into those types of questions with clients? Or what are some of the other kind of follow-up questions that you ask that our listeners should ask themselves?

Mark Kenney: Yeah, that comes up very often, especially if you have multiple children and some of them are in different points of their life, different ages, and different financial situations. And I think that’s our role is when we’re having these reviews is reassess your legacy/estate plan. I’ve had people that we’ve had these open dialogs and they’ve gone back and changed their percentages based on maybe they gave a gift to one child and they wanted it to be equal at the ends and they’ll change the percentages of their beneficiaries to compensate for that because they feel and it starts, I think, a lot of times it’s an open conversation. A lot of times, you have to talk with your children about this. And I think that’s difficult for some people.

But I always say, when you’re gone, at that point, it’s what the law reads, right? It’s what the trust reads. There’s nothing that could be changed. And having an open conversation about your children, I think, makes it most transparent and easiest to do that in setting expectations. A lot of people that I’ll sit with, they say, “Listen, I don’t expect to get an inheritance,” but I think it may be there, right? and I don’t want anyone to expect something, but you have to plan for being there.

And then it goes into, well, I have three different buckets of money. What is the most efficient bucket to leave a child? And then we get into the taxable accounts versus the nontaxable accounts. You have the consideration any homes, right? Who’s going to get the home? Is one child going to want to buy out the others because you might have four children. You’re going to leave them this big house. One child might be in a position where he can buy out the other three. Maybe none of them have the financial wherewithal to do that and they plan on selling the house.

But again, you’ve got to give them that conversation to say, “This is what’s going to happen. How do we best want to address that?” Because when you’re mourning, it’s tough to make clear decisions about that. And you don’t want to be put in a predicament where you have to do a quick estate sale and lose money and have emotion tied to it. And then, obviously, that can have ramifications on family dynamics.

Matthew Peck: Harmony.

Mark Kenney: Or harmony, yeah.

Matthew Peck: I always use that term family harmony.

Mark Kenney: And so, that’s where it comes into having an open dialog. And a lot of times, when they draw up these documents, I encourage them to send them to their children, especially if they’re naming one of their children successor trustees. And maybe I take a step back, and what is a successor trustee? So, when you create a revocable trust, that is a trust that you own during your lifetime. You can put things in and out of there.

But upon your death or the death of the trustees, the grantors of the trust, you have to name a successor trustee, which is someone who’s going to come in and manage the money for the beneficiaries. You can name a child or children, and some people don’t feel comfortable with that and they’ll name an outside law firm that has no skin in the game, that just reads the letter of the law, the trust, and doesn’t have any emotions. And I’ve seen both and there’s pros and cons of each, but that takes a conversation and understanding what are the pros and cons, what should I do? And I’ve had people go back and switch where they have named children. And then they thought, “Well, there’s six of them. I don’t want them fighting. I’ve now named an attorney, a successor trustee as the attorney.”

Matthew Peck: So, that’s what’s amazing, guys, is you could tell for all of our listeners that there are a lot of questions to ask yourself just on this one world. So, first, if you are asking yourself how to start, I do want to point out that we have two very, very helpful websites that you can go to. The first is what’s called SHPQuiz.com. So, it’s www.SHPQuiz.com. Now, on there is a quiz that you can go through all the five worlds – income, investment, tax, health care, but obviously, legacy planning. So, you can take the quiz and see how your plan stacks up right now. Have you asked yourself these questions? And what has been done? What has not been done? And how do you stack up? If you want to just do a little bit of research itself, we also have a website called SHPGuides.com or www.SHPGuides.com, and that also has a lot of white papers and good information on, again, all these five worlds, including legacy planning. So, please visit those two websites at your earliest convenience, so whenever you would like to learn more.

I do want to go back to another question, too, or something that you brought up that was interesting, Mark, which was lifetime giving versus giving upon passing. Okay, so let me sort of unpack that a little bit. Sometimes, I’ll ask clients, I’ll say, “Okay, well, do you want your–” let’s assume their income plan is all good because let me quickly interject that when we do someone’s cash flow or their income plan and if they are in fact spending to the last penny, legacy planning isn’t necessarily there.

Mark Kenney: Takes the back seat.

Matthew Peck: Yeah. Because there is no legacy if you’re spending more or if the projections there that you die penniless and there’s nothing wrong with that, too, people can spend their money the way they want. They’ve worked very hard for that. But let’s say the other situation arises where we take a look at their overall financial plan, we realize that, okay, you are projected to have almost more money at the end of your retirement than when you started. And so, it goes into legacy planning of what we want to do.

And then the idea of gifting comes up and people say, okay, I want a gift, should I gift, etc. But I always talk about how that kind of gets it to a higher level, which is when we’re talking about legacy planning, how much of it do you want to gift now? How much do you want to give to your kids? See them enjoy it. Maybe have them start off with a new house or whatever it may be versus how much do you want to leave upon passing? And like the answer to legacy planning, there’s a scale and a spectrum to that. So, talk to me a little bit through how often does that come up? How have your clients done it? Do they lean one direction or else? And then what type of advice do you give in either direction?

Mark Kenney: That’s a great question. So, gifting is giving money to anyone, doesn’t have to be a child, niece, nephews, next-door neighbor, in a tax efficient way during your lifetime. And I think getting some value out of seeing them enjoy the money. Now, how does that start? So, we are doing a review. We want to using modest assumptions, say, listen, there is going to be money left over, right, given a life expectancy of 90, 95 and we can go out from there. And if there’s going to be money left over when you pass, are you more apt to give it to them while you’re living because maybe they can use it now?

Well, we live in Massachusetts. It’s a very expensive part of the country, right? And it’s gotten even more expensive. So, could we help them out now through a gift? And if you’re not aware, you’re allowed to gift every individual $17,000. I don’t know if it’s going up next year. I haven’t looked at 2024 numbers. But you’re allowed to gift $17,000 per person without you reporting it or the recipient reporting it. So, essentially, it’s a tax-free gift.

And moreover, if your daughter or son is married, you can do gift splitting and give it to both individuals. And moreover, if you’re married, you can even do double. So, technically, a married couple can give $34,000 to each of their children, $68,000 to their married spouses together without reporting it. And what that does is reduce this potential estate number that’s going to grow and grow and grow and maybe save them tax dollars, right? Because when you pass away in Massachusetts, there is an estate tax that you could or your heirs could owe, so you go to look at the value of that.

And I think it’s a balancing act, too, is that some people don’t want to give money away if they feel like they’re going to run out of money. And that’s where I think running these assumptions using modest sums and say, “Listen, it just can’t happen.” There’s going to be X amount of dollars left. And do we want to give them to it now? And that you get a little bit of feel good when you give to charity that you can see them prosper, you can help them out now. Otherwise, they’re going to get it 10, 15, 30 years down the road. It could be taxable and they may not need it. So, it’s giving them that boost now. And more and more clients are doing that. I think, again, it’s based on the first couple of aspects of our road map is looking at an income plan, making sure that they see that their funds are going to last, that their investments are going to run out, and then they can make an informed decision as to when they best want to give it to heirs.

Matthew Peck: Well, that’s the thing. So, two things, (a) I think there’s a lot of misunderstanding in regards to the gifting rules and who it applies to. I mean, I joke around with clients who say, “You could gift $34,000 to me if you wanted to.” I mean, literally, the next person that walks down the street, you can gift $17,000 to, let’s say as an individual without the gifts putting stuff and no problems, here you go, have a great day.

Mark Kenney: That’s correct.

Matthew Peck: I mean, they don’t have to be family members. They could be neighbors. They can be whoever that you want to. But let me go back to why wouldn’t somebody? Why wouldn’t you gift more during your lifetime? How do you warn people not to? Or when do you tell people, “Hey, I’m not sure if you should” or “Here’s something to consider about gifting”?

Mark Kenney: Well, a couple situations will arise there is that once you gift money to someone, you have no control over how that money is spent, right? So, if you have an heir that you’re worried about and you think they’re going to frivolously spend the money, once you give it to them, they can do what they want with it and they can come back to next year and say, “I need more money.” So, I always think it’s understanding that we’re in a trust situation where once you pass that money goes into trust, you can stipulate how that money’s to be passed out, in what capacity, where once you give them to the recipients, it’s under their Social Security number, they can do what they want with it. And you kind of lose a little bit of control over how that money is spent.

And again, I think it’s understanding that you’re going to be okay, you can use, you can gift this money, and you’re still going to have enough for you to live your life for plenty of years to come. So, that’s the way I kind of deal with it, is that, listen, you can give it to him now. It’s going to go under their tax ID. Understand that if they get sued or if they go through a divorce, that money is now in their bank account. It’s subject to any of their creditors or any of their liabilities, so be careful with that. And that’s how I usually leave it with some of the clients.

Matthew Peck: So, really, it’s about control. I think that’s the big one that I very often talk about is the lack of control. And you mentioned creditors and whatnot. But before we leave gifting, I do want to share or talk about how (a) as I mentioned earlier, things change, especially with grandkids. But then there are specific gifting rules that apply to 529s. Those are slightly different than normal. The $17,000, I believe, get supercharged.

Mark Kenney: Yeah, five years.

Matthew Peck: Yeah. So, if you don’t mind walking through for the listeners how the rules are slightly different or more generous when it comes to educational accounts.

Mark Kenney: Yeah. So, 529 accounts, for those who aren’t aware are basically college savings accounts with some tax advantages in there. And the rules of the 529 accounts is that a grandparent can put five years’ worth of gift, so 17 times five into a 529 in one calendar year without it being taxable. So, essentially, you can get $85,000 into a 529 account. And that obviously reduces your estate or potential estate taxes that you’ll owe. Now, that recipient grandchild is not supposed to receive another gift for five years because you basically just frontloaded five years’ worth of gifting.

Now, the beauty of the 529 account is all of that money, all of that growth is then tax free if they use it for a qualified expense, which is third-level education, can be a private high school. So, if you want to give money to a grandchild and you want to see them go to college, you can put five years’ worth of gifting in there. You can actually still be the custodian of that 529 account, meaning that you control the money in there. It is for the beneficiary, which is the grandchild in this scenario.

And if that grandchild doesn’t want to go to college, you have the right as the owner of that account to change who the beneficiary is for, maybe for another grandchild or maybe for someone else. And you can do that with limited taxes being owed. So, it is a way to quickly reduce the potential size of your estate. Have your grandchild set up for a great college, I mean, $85,000 will probably get you at least a couple of years at some of these universities.

And again, if you are a married couple, your grandparents, you can double that because each person can gift. So, you can now get $170,000 and that will definitely cover Boston College for a couple of years and get that money in there, see them succeed. I mean, you’re setting them up for now a lifetime of having a college education, hopefully seeing the dividends pay off, shall we say, in an investment philosophy. So, that is one account that does allow you to do more than just one year’s worth of gifting.

Matthew Peck: So, Mark, this is amazing. I mean, thank you so much for coming on board, coming on the show. Guys and gals, I mean, imagine this. I mean, we literally spent about a half an hour talking about legacy planning and we barely brushed upon the taxation. I mean, it came up a little bit about the taxation of it and about the gifting and avoidance of estate taxes or minimizing estate taxes. But there’s also capital gains taxes and the idea of step-up in basis and how that affects legacy planning and how that affects recommendations to buy or sell a stock or buying or selling a property, right?

And then we didn’t talk about the investment planning themselves, about, okay, all right, how are your investments structured to maximize legacy? Maybe you have one account that’s going towards legacy that might be invested a little bit more aggressively in other accounts. And we brushed upon how income planning plays a role because, okay, what’s the long-term projections? I mean, we spent half an hour and we barely scratched the surface in my nerdy opinion or when you get to this new room.

Mark Kenney: It is true about like…

Matthew Peck: Two talkative CFPs, I might add.

Mark Kenney: What accounts you leave, that’s really, we didn’t have time to go over, but what accounts? You have an IRA, you have a Roth, you have life insurance. What accounts should be left to the children? What accounts maybe go to charity and give you sort? We didn’t even get into that. And that’s a whole different topic.

Matthew Peck: Right. And it’s a great point. And I forgot about that charity and we didn’t talk about the stretch IRA rules with 10 years. So, ladies and gentlemen, there’s so much that goes into this and that’s why as biased opinion here too, anyone that’s a do-it-yourselfer, like, yeah, I’m sure you might be a great stock picker and you love mutual funds and reading Kiplinger and Money magazine and I have all the power to you, but you can tell, ladies and gentlemen, that the amount of work and thought and comprehensive nature to financial planning that you need to look at this at all different angles and this is why, again, biased opinion that it’s great to hire a true financial planner, to hire a CFP in your corner so that he or she is looking over all of these different aspects.

So, as I mentioned in the beginning or midway through, if you are wondering how to start this whole process, we highly recommend that everyone goes on to www.SHPQuiz.com, SHPQuiz.com, and that allows you to begin the process of just prompts. It’s a quiz, I mean, it’s an easy quiz, don’t worry. No pass or fail there, but it just starts to ask you these questions that are important in all of these five areas – income planning, investment planning, tax planning, health care, legacy planning. There’s just so much there. And then, also, if you want to get started too, you can go to SHPGuides.com or www.SHPGuides.com for a lot of great white papers or some good research information on all of these topics.

So, again, Mark, thank you so much for joining us. I really appreciate it. Hopefully, we can have Mark back, I’m sure he will, to maybe dig more into this or other aspects of these five worlds. But thank you again for listening to the SHP Financial Retirement Road Map radio show. Until next time. We hope everyone is staying happy and healthy in the New Year.