The Biggest Threat to Your Wealth Is... Sitting at Your Table?

I mean, the fact of the matter is family and heir risk. Yeah. It's huge. If you ignore the people that are part of your financial plan, everything that you've done can go right out the window.

Can you imagine the sleepless nights when you have a big family and they're worried about what if?

Using legal structures like a will, like a trust allow you to control the timing and the purpose. Yep. Of the inheritance.

Those unprepared heirs can be detrimental to an estate. It can be detrimental to that person for sure. It can destroy their life.

The biggest threat to your wealth isn't always the market, the economy, or even taxes. It can be the people sitting at your Thanksgiving table. Today, we're exposing the hidden risk inside families, the risk that, by the way, can destroy the wealth that you've worked your entire life to accumulate, and how to prevent the destruction of that wealth.

Phil, most people think when they think about family issues, they think that wills and trusts being in place make them protected or protect them completely. Why isn't that always the case?

I think everybody believes that once they have a will or a trust, they feel insulated. Fact of the matter is it's not enough. A will and a trust is not dynamic, right? They don't change automatically unless you affect the change. They are what they are. A lot of people build the will and the trust and they set it and forget it, Spell. And life is dynamic.

Yes, it is.

Families are dynamic. They change. And so when those changes are occurring, there's risk occurring.

Yeah.

And those risks have to be dealt with. And the only way you deal with that is to have routine changes, routine sessions where you're seeing things within those legal docs that might need to be updated. If you're not looking at it from that perspective, you're going to use set it and forget it and then you are going to have problems.

The fact of the matter is, Spell, family and heir risk, yeah, it's huge. You've got people that are unprepared all the time. And when I say they're unprepared, it doesn't mean that they haven't built wealth and they don't want to transfer it. What I mean is they're not thinking about family disputes. They're not thinking about divorces. They're not thinking about unintended consequences by way of an inheritance that doesn't go the right way, right? Or there could be a sudden death. So many things that can happen. They just create a lot of risk. And if you're on set it and forget it, you're going to miss some of those things and they're going to cause a lot of consequences and probably cost a lot of money.

Phil, the image on the screen is a family surrounding a Thanksgiving table. There's big turkey in the middle and everybody's focused on what's on the table. And I think that is a nice analogy for how a lot of people think. We get focused on what's in front of us and what's on the table and we sometimes forget about who's around the table.

We get to Thanksgiving, there's not that many arguments, at least until late in the afternoon. Most everybody is just filling their face with great food. It's one of my favorite times of year. And what do families do? They say, "Hey, I'm going to Thanksgiving. Let's don't talk politics. Let's don't talk about this or that. Let's keep peace." And I think a lot of families try to go through life in that same way. They don't want disruption. Fact of the matter is, if you're not planning, those disruptions are happening and sometimes beneath the surface where you don't see them, and all of a sudden when they rear their head, it can get pretty ugly.

It's true. That's true. And it's not just smaller families. I come from a very large family and we work with a lot of very large families.

Yeah.

That table would last about 3 seconds at my Thanksgiving. That's just a few people. That turkey be you all did last year. I think you all did three turkeys. Three fried turkeys, right?

Yeah, we did. That was a... That's good memory.

So, before we get too deep in today's episode, Spell, I just want to share, life's dynamic, as I said, and so I think right out of the gate, I can give three things that will help people right now. These are not the end-all be-all, but these are things that someone could be doing.

One, and we'll talk about this a little bit more as we get deeper in the show, but updating their beneficiary designations. I see that mistake made all the time until it's too late.

Yeah.

And that creates unintended consequences. It can create family discord and it can do it very quickly.

Yep.

The second one is documenting everything and having a clear distribution strategy, a clear distribution plan with the family. And what that means is they don't necessarily have to know amounts all the time, but the family needs to understand what the plan is, right? If they don't understand the plan, when it comes down to the plan being read or dispersed as it were, you run a big risk of a lot of family discord.

And the third one is making sure that you have the right legal structures in place. People use all kinds of things. In some states, Spell, you can write it on a napkin and that's considered a will.

It's true. A last will and testament. You can put it on a piece of paper. Our state allows that in North Carolina.

Yes, we do. But using legal structures like a will, like a trust, could be LLCs, a number of things. Those things allow you to control the timing and the purpose.

Yep.

Of the inheritance. Those three, if our viewers, listeners don't get anything else, those three make a difference right now.

Yeah. So, Phil, I know we're going to go through three scenarios today, and I think they're all great. And you just mentioned three things that people can take away quickly. These three scenarios might take us a minute more to go through, but the first is inheritance wars. So discord amongst the family. People are upset. So that's point one. Divorce is point 2. Unfortunately, I think the divorce rate in the United States is what, 50%?

It's right around 50%.

Right around 50%. So that is extremely common. And then number three is unprepared heirs and how devastating an unprepared heir can be to a family's estate. Walk us through those three scenarios.

Yeah. So first the inheritance wars thing that you mentioned. I remember, Spell, when my mother passed away, and it hasn't been that long. We're coming up on a year.

Yeah.

And my mother was not a wealthy person. She and my father did okay and they had a roof over their head, but we didn't have a lot. And so when they passed, we didn't need a lot of legal documents, right? In fact, Spell, there was some 60-year-old cast iron skillet. That was all I asked for. That was the one thing that I wanted out of the house. I didn't get that. A niece got that. It was my mom and it was the skillet I grew up with and I sort of wanted that.

Yeah. Yeah.

Just a simple legal document would have preserved where things were supposed to go, right? And now add lots of money to the equation, right? And all of a sudden you really need things, otherwise you're going to have siblings or grandchildren or whoever's part of that family. They could be quibbling or downright fighting for a long time.

Divorce, you mentioned that. Huge. That one can just rob estates in a huge way.

Yeah.

And then I think just for a minute before I dig into those stories, Spell, it's unprepared beneficiaries. One of the things that I love about what you do with some of our clients is working with the younger generation. You work with a lot of their children who are, they're not infants. These are sometimes grown people.

Yeah.

Really taking them through financial literacy and helping them understand what they need to know, because when they don't know it, all of a sudden... We don't know when inheritances are coming. Nobody knows when their time is, right? And so suddenly these young people, if the trust is not laid out the right way to protect, they could all of a sudden inherit millions of dollars.

Yeah.

And without the financial literacy, without those mechanic, those fundamentals...

Yeah.

...being in place, then I think those unprepared heirs can be detrimental to an estate. It can be detrimental to that person for sure. It can destroy their life.

Yeah. And we've seen that.

Yeah. Unfortunately, it can. They can make so many wrong decisions so quickly because they've never had that kind of wealth. They don't understand what to do with it and before you know it they have themselves in a really not so desirable position that usually doesn't end well.

So let me share a couple of real world, I'll almost call these horror stories, because they didn't end well. And these, I'm going to go way back to the earliest parts of my career. We had a family, and Spell, I was so young in my career then, I didn't really know what to do with this situation, but here's a family, lots of money, siblings, and everybody thought that mom had everything ironed out perfectly.

Yeah.

No wrinkles in anything. Everything was good.

Yeah.

And if mom passed... The father had predeceased mom by a number of years. And so when mom passed, everything's going to the kids, and the kids assumed everything was okay. I was new to this family and really just learning about the family, but along the way, one of the children died. And so that child predeceased mom. Well, mom never mentioned needing to change beneficiaries. Along came me as the adviser.

Yeah.

I wasn't asking about those things. Heck, we were just getting involved with that family. And then all of a sudden, mom dies. And I've got children ringing me because mom, even though I was new to this family, apparently my name and number was handed to everyone in the family and they said, "Hey, if something happens, call Phil."

Yeah.

Well, 30 years later, that's exactly how we do it today. We encourage those very things to happen. Call us and we've got everything buttoned up, dialed. Well, at that time, things were not laid out exactly right. The wills and the trust documents were not dialed in to the degree that they should have been. And mom failed to change the beneficiary designation for the part of the estate that was to go to the son that had already passed away.

And he's passed. Yeah.

And so, Spell, the long and short of it is that estate got tied up in the courts for years.

Mm.

The discord among the remaining family members became really almost a spectacle-like thing. It was really not good.

Yeah.

The unfortunate part of that kind of event is it cost hundreds of thousands of dollars to get this thing settled with all the legalese that got brought, or the legal teams that got brought into it.

Yeah.

The worst part is you have siblings who don't speak anymore because they felt like things were being done the wrong way, that things weren't done for their benefit. And it just left people in a place of discord. The harmony was gone.

Yeah.

Those things don't have to occur.

No.

Right? With the right planning. And that was a simple one that just started with beneficiary designation.

Yeah. That could have been avoided pretty easily. And the other thing, Phil, if I may, whenever an estate is moving through probate, the assets don't pass to the beneficiaries until everything has moved through probate, right? Very few things can pass once the estate goes into probate. The only things that can pass would be something that's non-probatable like life insurance or certain assets that can pass around or move around probate. Otherwise, everything's stuck.

It's stuck.

Yeah. So, I would say that horror story is probably a good way to describe that.

Yeah, I think that's pretty spot on. Well, I'm going to share a second story with you. This is a family that's worked with our firm for the best part of two decades.

Yep.

And in this case, we have a situation where the patriarch is deceased. And matriarch is going to remarry.

Mhm.

So we go through the process of building these estates the right way and getting them what we think is bulletproof. We design it in such a way that things can't penetrate the fortress so that the right people are protected. And in this case, we end up with a new marriage, a second marriage, if you will. And so then you have all these siblings who were worried. They're concerned, and rightfully so.

Yeah. Oh, yeah.

Because what if the matriarch now is persuaded to make changes to things, because nothing's irrevocable.

That's right.

Everything in this estate is revocable, can be changed, and no one needs to know about it except the person who controls all of it. And so that could happen. A lot could go wrong.

A lot could go wrong here.

We don't expect that.

No.

But can you imagine the sleepless nights when you have a big family and they're worried about what if, right, this happens?

Yeah.

Or what if that happens.

They're legitimate concerns for sure.

Yeah.

And so in this case, in a family meeting, which we'll talk about that a little bit more in just a minute, we said, "Look, there are ways to preserve all of this. There need not be anxiety and worry there. What we need are a few new things, new tools, if you will, added to the kit, right?"

And once we came up with what those things are, prenuptial agreements, one, there's a host of things that we had to do, but really just minor tweaks and getting those things in place, the family can rest and know that regardless, the outcome will be inheritance the way it was intended.

Yeah.

Right people, right time in the right way. And that's what you really want in a well constructed estate plan. That's what you get despite family discord. In fact, I believe you can avoid the family discord if you do these things the right way on the front end. Family meetings, lots of conversation, communication, you can avoid those problems.

So I think what you're trying to get across is planning, which indicates that you've done something before it happens.

Yes.

Can prevent someone from walking out the front door with a suitcase full of money.

That's exactly the message. And I think, Spell, the more we're in this profession, the more I work with families, the more you work with families.

Yeah.

You know what's interesting, Spell, is a lot of times that front door is left wide open.

A lot of times it is. It's just not intentionally.

No, it's not in malice, but it's wide open.

Yeah.

And if someone doesn't step in, like a really finely tuned planning firm that understands where the risks are, right, you could be exposed and you don't know it, right, until it's too late. And that's exactly what most families don't want.

We'll get right back to today's show, but first, I'd like to ask you a quick favor. If you're enjoying this episode, hit that like button and make sure that you're subscribed to our channel so you don't miss what's coming next. And hey, if something in today's episode has you wondering about your own financial plan, why not get a second opinion? Visit omnistarfinancial.com to schedule a consultation with one of our team members. It's quick, it's easy, and it could make a huge difference in your financial future. Now, let's get back to the show.

So, Phil, we're going to use an image that we've used in a previous show, and it's an analogy that you're writing about, but it's the financial fortress. And so that is analogous to a number of our elements. And comprehensively, it's analogous to what we do. So talk about how a fortress can be viewed as a family wealth fortress. What are the parts to the fortress and what do they mean?

So metaphorically, Spell, the fortress can easily be thought of in the financial realm, and in this case today we're talking about estate planning. And so if you just start with the moat, people often think about the moat as, in the old days, if you will, in the medieval times, the moat had the crocodiles house.

Oh yeah.

Oh yeah. That was protection.

Those things are big.

Yeah. That's real protection. You have a drawbridge, and so you didn't want to try to cross that moat, and if the drawbridge was up, you weren't getting over it.

Forget about it.

And so that moat represents the legal structures, the wills, the trust, the documents that we need to protect. What we really want to do is build this thing so that you don't get across the moat in the first place.

Right.

Right. Then you have those outer walls. And those outer walls are other tools, things like life insurance, things like those things that might avoid probate, by the way, but things like that that help add to the estate or add to the planning and the distribution of the state.

Yeah.

Then you get to those inner walls, and you will find things like emergency reserves. You'll find more of the investable assets. So we've protected from the outside in so that you can't get to those things, and when it's time those things can be distributed properly without family discord and without the wrong people getting into what is being preserved for another generation or two or three or however many it is, right?

And so that fortress, I think it's so important. If we don't build the fortress from the beginning, then you're, chances are the family's going to go through some challenges, right?

Yeah.

Consequences are going to prevail.

Yeah. And as you said a few minutes ago, we see it.

Oh, yeah. We definitely see it. We definitely see it.

Phil, there's a bunch of pieces to a fortress, and it can take a lot of effort to not only build the fortress but keep it maintained. So what's your advice to listeners on maintaining that fortress? What do people need to do in order to keep things at par?

First thing is realize, as we said at the top of the show, it's, life is dynamic. Don't just stop thinking that, oh, I've got a will, or oh, I've got a trust, or I'll get to that. Number one, we don't know when we're going to leave this earth.

Yeah.

We have no idea.

Yeah.

And so I would encourage people to start thinking about their planning. If you don't have wills or trust or legal docs in place, at the very least, you need that. If you have income and you have any kind of an asset or assets, if you have a family, you need at the very least a set of legal documents to be sure that things go to the right people, right time in the right way.

If you've reached the conclusion that you need more, you've decided, hey, I've built a little bit of wealth, I want to make sure that things are done the right way. The first thing, Spell, is, as you know, we encourage family meetings.

Yeah.

I think without a family meeting you miss opportunities to really build the continuity of that family. You lose the opportunity. You miss opportunities to keep peace, to have good accord. So I think family meetings, and a lot of people say, well, what the heck is a family meeting? How do I do it? What does that agenda look like? Well, it's not as hard as people think, right? We host these things a lot, and family meetings are just a natural part, often overlooked, but a natural part of estate planning and good wealth management.

Second, it's educating those heirs. And we alluded to that and then touched on it for a minute early in the show. I think that part is overlooked a lot more than it should be. We say this all the time around the firm. People work their entire life to build wealth.

Yeah.

They spend very little time, right? So they spend a lot of time preparing the money to go to the next generation. What do we always hear? Well, I want, I don't want to pay any taxes.

Oh, yeah.

I want to be sure I send all this to my kids. I want their life to be better. So I just, I don't want Uncle Sam to get this. And they just spend all kinds of time preparing the money. They don't prepare those that are going to receive it.

Yep. That's true.

They say, "Well, we've got good kids. They'll do fine."

And well, they could be doing a lot worse. I think they...

That's the wrong way to look at it, right? You might think your kids are the greatest thing on the planet, and most parents do, and I don't have any problem with that. What I can tell most parents out there is that unless your child is just an anomaly, they receive millions of dollars, their way of looking at life can change in an instant.

It probably will.

It probably will. And so I think good education, teaching stewardship, right? Money stewardship, so important.

Yeah.

Three, it's making sure those legal documents are updated. We said they're not dynamic like life is.

True.

They're static. Once you build them, they go in the drawer or in the vault and they stay there until someone pulls them out, knocks the dust off and says, "Hey, we need to make some changes." So updating those legal documents, so important.

Building guardrails. So who are the trustees? Who are the people with oversight here? What a distribution? What do the distributions look like?

Yep.

Will they come in a lump sum? Do they happen at 25 years old, 40 years old, 30 years old? Are there triggers? Are there reasons to believe that we need certain triggers before money is just dumped out to these hopefully prepared young people? But do we want to just give them lots of wealth in one lump sum? And chances are that's not the best idea. So how do we do it? What do those distributions look like?

And number five, one of the biggest mistakes that I see people make is not integrating financial planning with the family meetings.

Yeah.

In other words, they can have the meeting, but you really need to understand the planning. How is this wealth going to change the lives of those who will likely receive it, but what does their wealth picture already look like? Meaning those beneficiaries, right? Will an inheritance cause them problems? Not in that they will do bad things with the money, right? But will it cause taxation for them because they're already, for example, in a really high tax rate, or maybe there's other wealth coming from, maybe they're married and their spouse is also expecting an inheritance.

It's true.

What does all of that do, right? And so good integrated planning with everyone concerned can have a really powerful effect on what the planning should look like, how it's going to affect everyone, so that we make better decisions.

It's true.

Those five things, those are sort of the wealth harmony steps, if you will. And without those, I think a lot of things can get missed. With those things, you at least have the beginning of a good path, right, on which you can travel. And I think you get better results.

Well, without those, your fortress might crumble.

And I think every family wants to build something. And I believe every family wants their name to have something of a legacy. I think they want to leave things behind. I hear families all the time say, "Gosh, I really want to leave something to my kids."

Yep.

And I think that's a noble thing. What doesn't work very well is when you don't plan for it. And if you don't work with someone who can help you with those plans, then just go ahead and reconcile yourself to the fact that probably a lot of mistakes are going to be made, and you're probably going to do more harm than you are good. At least there's that risk, and that risk could be avoided, Spell.

It's true. It's true. You can have, Phil, you can have the perfect portfolio, the best insurance, legal documents in place, but all of that can go right out the window if you ignore the people part of your financial plan. I think that's a super important take-home for the listeners.

Phil, today we covered one of many things that can steal wealth from your estate. Click on the screen right now to view a video that we did last week on far more things that can steal wealth from your estate. Hey, and we'll see you next time on We're Talking Money.