Boomers Expecting Big Bequests May Have Rude Awakening

“We talk with baby boomers all the time,” says Kevin Queally, a first vice president at Merrill Lynch in the Wellesley, Mass. office.

“We talk about (assets in) their 401(k)s, their Social Security, and their homes. We also try to urge them to do supplemental savings, but when we do, they’ll often say, ‘We’ll be okay. Our parents have that all set (i.e., will leave a big inheritance), so we don’t need to do supplemental savings.’ “

That sums up a looming problem in boomer-land: because many boomers expect to inherit a lot of money or assets when their parents die, the boomers are not motivated to get serious about supplemental saving. Believing they will be well set in their senior years, due to their parents’ bequests, they also may not be motivated to do retirement income planning.

This poses challenges for financial advisors. The nature of the challenges, and how to respond, is the focus here.

“Many boomers are not aware of how much they will get from their parents,” says Queally. “They don’t even know what is in their parents’ estate documents.”

What’s more, a lot of times, boomers think their parents have a lot of money because of the way the parents live, says Donald S. Hardy, founder of Quantum Benefits.com, an Atlanta, Ga. agency. But when the parents die, “they find out that the parents owed a lot of money (to creditors), so their adult children end up getting a pittance.”

The other side of that situation occurs when the parents see their boomer children living well. The parents assume that, since their children are so well off, the parents will leave much of their estate to the grandkids, says Queally. The problem, is, some of those boomers have been living well expressly because they had been expecting to receive a large inheritance from their parents, he says.

Another problem comes from boomers’ lack of awareness of how even a relatively large estate can shrink, due to longevity of the parent and/or exorbitant medical costs, says Paul McClatchy, vice president of financial planning for e-Money Advisor, Philadelphia. Some also are unaware that today’s retirees are “dipping into” their funds more than people expect, he adds.

He recalls one couple who was expecting to receive $3 million from Mom, “a widow who will pass on soon.” They wanted to include that money in their financial plan, says McClatchy. This opened up a whole discussion about how longevity, health costs and other factors can eat into estates, and about how it’s difficult to know the time when the money will become available, he continues.

“That sobered them up,” he says, adding that “sometimes, you have to talk them off the ledge.”

Then there is the estate tax conundrum. Some boomers figure their parents won’t have any estate taxes to pay, points out David Stratton, managing agent for Lincoln Financial Advisors, Inc. and chief operations officer for Stratton Turner LLC, Anchorage, AK. “But that depends on what happens to the estate tax law,” he says. Some boomers aren’t aware that things could change.

Furthermore, if the parents don’t do any estate tax planning, and if the law does change in a way that makes the parents’ assets subject to estate taxes, “the kids won’t get anywhere near what they were planning on,” Stratton says.

Another problem is that a good chunk of parental assets is often tied up in real estate, says Queally. Most parents arrange for their assets to be divided equally, he explains. So, if the real estate passes to the boomer children but if one of them needs liquidity, the other siblings must then consider how to buy out that sibling. When doing their planning, the parents and the boomers may not have clearly understood these dynamics, he says.

Intergenerational estate documents can cause problems too. In these cases, says Queally, a parent may set up a generation-skipping document that pays income to the boomer child but leaves the rest of the estate to the grandchildren. The parent and boomer may assume the document would allow the boomer to have access to the underlying assets if necessary, but some documents are not worded that way, he says. In hardship situations, this can be a major difficulty–caused by rigidity in the estate documents, inadequate communication and understanding, and the resulting wrong expectations.