Is it really possible to die broke?
Written by Jim Yih
One of the common jokes around estate planning is the hope and desire to die broke! I joke about the goal to bounce the cheque to the funeral home.
The idea behind dying broke is that you should spend every penny you have because you can’t take it with you or spend it from the grave.
As much as this may be an appealing idea to some, the joke is it can’t be done because you don’t know when you are going to die and your greatest psychological money fear is becoming broke but still living.
Psychology is powerful
I love fellow blogger Preet Banerjee’s quote “Money is 90% psychology and 8% math.”
In the financial industry some people can go into analysis paralysis but despite logic, people tend to do funny things with money. It’s simply because of the psychological and emotional influence on financial decisions.
One example is the reluctance to spend money we worked so hard to save. Ironically, the more money you have, the harder it is to spend it. For most people, it is easy to spend income but more difficult to spend assets because our assets creates our psychological net worth and security blanket. The last thing we want is to see our worth decline.
The result is we tend to die with too much money. Ironically, in 20 years in the financial industry, I see more people dying with money they did not use than those dying broke.
Dying with too much money
Some would argue that dying with any money is dying with too much money. This may especially be true with the RRSPs, because all of the RRSPs are taken into income and taxed at once which can mean losing a lot of the RRSPs before the money goes to your beneficiaries
Giving with a warm hand
Instead of giving money to your beneficiaries with a cold hand, there may be some benefits to giving it with a warm hand while you are alive.
1. You get the enjoyment of giving. Alice is 73 and has a decent pension from her late husband. She says “I don’t want to give the money away when I die. When you give with a cold hand, you don not get to enjoy the benefits of giving like the smiles, the hugs, the thank you’s. I gave my niece $3000 to help her buy her first house and it’s been great to see here get on her own two feet financially. It is so rewarding to see the good that comes from helping others you love.”
2. Your executor will be happier. One of the benefits of giving money away while you are alive is it can simplify the estate for your executor. Being an executor is one of the most difficult and unpleasant jobs especially with bigger and more complicated estates. And worse yet, we often give this awful job to the people we love the most – usually a spouse, children or some other trusted family member. You can help your executor by simplifying the estate and diarizing all of your affairs.
3. Save time and money on fees. The bigger the estate, the more fees and taxes that have to be paid at death. Giving your money and assets away while you are living can go a long way to reducing these probate fees and taxes. I love the comment from Marvin Toy, my co-author of Smart Tips for Estate Planning “The worst estate to be an executor for is the estate of a hoarder. It’s better for everyone if you just say no thanks for that job.”
4. Creating lasting experiences and legacies. When people we love die, what are you more likely to remember about them? Do we remember them for the money they left behind? Or do we remember them for the experiences we shared with them? Or the meaningful things they did with their money while they were alive? Money can be very powerful and your legacy may be more dependent on what you do with your money while you are alive than where it goes when you die. If we go back to 73 year old Alice, she has started a tradition of the family reunion holiday and every 2 years arranged to get the family together on a holiday. She goes so far to rotate financial help for different family members as part of her legacy and giving her inheritance away while she is alive. What do you think the family will remember when Alice passes away?
5. Use money to teach others about money. When you give money to your loved ones through your estate, it’s very possible (and maybe even likely) that they will spend it in ways that you do not approve of in the first place. When you give money with a warm hand, you have the opportunity to give with a lesson. Alice has a grandson that seems to struggle financially. She could give him money for a down payment as well but she has a firm belief that giving money away without a lesson is not as valuable as giving money with a lesson. In this case, Alice said to all her 5 grandkids that she will give them $5000 towards the down payment of their first or next house if they can save $5000 first. This is another great way to give with a warm hand.