Two separate incidents are leading me to write this blog entry. First, the way too early passing of Tim Tripcony just a few days ago, as well as as the loss of Rob Wunderlich, Jens Augustiny and Kenneth Kjærbye in just a little over a year. All of those members of the Lotus Community left us way too early. The second one is a more personal one, as I am going in for surgery in a few weeks. All surgeries carry a small risk of complications (this particular one supposedly has less than 2% mortality rate).
But what this leads me is to the subject of this blog entry. Life insurance.
Most of us who are employed have some kind of life insurance through our work, and perhaps like me also have an additional life insurance policy. I am sure that most of self-employed also have purchased some life insurance themselves. So we all know we need life insurance, to provide for our children and/or spouses.
But what should happen with the money, in case the worst happens? In my case, I am divorced, and have a 13 year old son. Should a 13 year old inherit half a million dollar or more just like that? Or even if the child has to wait until age 18 to get the money, and it is managed by the other parent for some years, what would that lead to? I have heard stories about young adults that inherited a large sum of money after the death of a parent, bought a fast motor cycle or sports car and killed themselves within a year. Or who started using drugs/alcohol and either wasted the money on those things, or were killed by the substance abuse. I also know about women who lost their husbands, and within a few years used up all the life insurance money on houses, new cars, cosmetic surgery, all while not working.
So how do you make a real impact on the life of your loved ones left behind? In my case, I am in the process of setting up a trust that will handle the investment of the money, as well as spend it in a way consistent with my wishes.
The trust will handle the payouts of the child support until my son turns 18, and it will cover his college education (tuition, books, living expenses) for up to 5 years, etc. It also have all kinds of other provisions, like a cash payment to help with his wedding (only one, and after the age of 27!), matching payments to him for what he puts into a Roth IRA every year, financial help to buy a car and a house, etc. Even little things like extra money for birthday and christmas gifts are listed there. In addition, the trustee will have some personal discretion to help out when needed, and of course any medical and educational expenses will be covered as needed.
There are so many little details that one has to think about. Until my girlfriend Chrissy brought this up a while ago, I had not really been reflecting much on all those things. So I recommend that everyone sit down and think through how you want your life insurance to be handled if the worst happens. Just having life insurance isn’t enough to ensure they’ll be ok.
Too much of a windfall could be a problem for someone who is not ready to handle it. Knowing an inheritance is coming could even discourage a child from going to college because they may think they won’t need the education. Most parents do not consider the negative impact it could have on a young person to receive a large amount of money at one time, but we should.
While we may not always be able to be there for our kids if the worst does happen to any of us before they are grown this is a way to make our wishes known about their choices. This trust is important to me because I can continue to parent him at the same time as I provide financially for him. Setting up a trust lets my son know in writing what my wishes for his life would have been if I had been here. A college degree, saving for retirement, marriage if he wants it but not until he’s mature enough to handle it, buy a house and I’ll match your down payment and even limiting access if he ever gets into legal or substance abuse trouble. These would be things I will do as long as I am here physically for him too.
As I plan for this surgery it allows me to feel like I’d get a say in raising him through the stipulations of a trust, even if I wasn’t here anymore. That knowledge calms me enough to face surgery without worry about my son. Not just in financial terms but also in respect to all the other things a parent provides.
Tough to think about, but so very important.
Not a cheery subject, but an important one. I bought a book called “Plan Your Estate” by Denis Clifford / NOLO press, that can help you to think through all the many aspects to consider with your estate (like passing on money to children, setting up trusts, etc.). But I must confess, I keep putting off reading it even though I know it’s something I really should be doing…
(also http://www.nolo.com is a site with good, free legal information)
That seems to be a great site, thanks for sharing.
Best wishes for your operation….
We are in the process of setting up a trust for G. I would advise not letting descendants have full access until at least 30 as their brains are still developing until 25. Also, make one of the terms a condition that if they marry they must execute a pre-nup that protects the trust from, as my wife says, a crazy future ex. Also think about successor trustees for down the road in case namesd trustees are no longer able to act.
Great points! I had not thought about the pre-nup, but the restrictions on age is something I had in. I was thinking smaller amounts, say $30K at age 30, $40K at age 40 and $50K at age 50.
and good luck on the surgery!
On the one hand I agree with you, on the other, I feel a little creeped out by the “control from beyond the grave”. What if at age 22, kid has fantastic vision for new business…but can’t access capital b/c dear old dead dad wanted college till 24, married at 28, down payment on house at 30. Ultimately, it is their life, not your vision of how you want them to live it. I think what you’re doing is noble and worthy, but don’t go crazy :-)
You got a point. Perhaps that would be an additional stipulation, that any other request can be left to the discretion of the trustee. If a payout can be justified as reasonable and beneficial, then the trustee should be allowed to make that call.
However, in case it is a child that think a Ford F-150 Raptor with a 411hp V8 and 11mpg gas mileage is a proper first car for a teenager, it might be a good idea to prevent that from happening. Just sayin’ ;-)
Exactly. Leave it to discretion of the trustee. We are working with a trust attorney AND CPA to structure G’s trust with flexibility to ratchet controls up and down as needed so she would have no need to touch the corpus unless the trustee agrees. But our situation is a little different than yours.
I think if he’s got a fantastic idea for a business then he can fund it the same way the rest of us do… hard work followed by convincing investors that it’d be a good idea for them to support. That could include convincing a trustee who has some access to the money to agree to support it. I say that as the owner of two businesses.
There is nothing wrong with entrepreneurship and hard work. Investing more of his own energy into a new idea will increase the possibility of success of a new business. When karl gets through surgery with no problems and this situation comes up in the future I hope he will encourage his child to work hard in the same way.
It has nothing to do with control beyond the grave. It has to do with his son being smart and capable enough to not need handouts for every little thing. He is an amazingly capable young man and I for one would hate to see him lower his motivation to work hard because money was easily handed to him under any circumstances.
That is not a favor for anyone when you look past the initial reaction of excitement and exuberance about a windfall of money. We should work for things in life if we are to value them.
Its highly possible that his child may decide to get married early or not go to college, for instance. He is entitled to make his own decisions but karl is entitled to determine under what conditions he will fund those choices. Other choices he makes are his to make and can be entirely self funded, which accomplishes the goal of hard work and self motivation though, doesn’t it?
Win-win.
WOW! Karl-Henry. I’m really I impressed with the thought and love behind your actions in this regard. You’ve inspired me to do something similar as well. Thank you.