September 11, 2023
6 Steps to Plan for a Future Inheritance
When it comes to an inheritance, it’s good to plan for the expected and even better to plan for the unexpected.
Within the next 20 years, trillions of dollars are expected to be passed between generations. Whether you’re expecting a life-changing inheritance, a modest inheritance or maybe not anything, it’s an important situation to think about. Although everyone’s situation will be different, there are steps you can take to make sure the transfer of wealth goes smoothly.
1. Take care of yourself mentally and emotionally.
Coping with the loss of a loved one can be one of the hardest things to go through in life. Anticipating that can be equally as hard. Before you even get started on the ﬁnancial aspect of an inheritance, it’s crucial to address the personal aspect, ﬁrst and foremost. Make sure you are mentally and emotionally prepared to begin these conversations. Take care of yourself.
2. Communicate early on.
Whether you’re the one who will inherit wealth or will transfer wealth upon death, conversations about this topic can be uncomfortable. However, the loss of a loved one is something everyone experiences. Communicating in advance is a good way for everyone to get on the same page and know what to expect. It’s better to have answers to hard questions than to be left wondering when there’s no one around to answer them. Knowing what your predecessor’s estate plan consists of, for example, can help smooth uncertainty when the time comes to distribute their wealth.
In addition to communicating with your predecessors, if you are married, it’s equally important to communicate with your spouse. Often one spouse inherits wealth without having any prior conversations with the other spouse about how it will be used. Couples who haven’t planned may disagree on how to allocate these assets once received, leading to more uncertainty and stress during an already difficult time.
3. Make sure your own aﬀairs are in order.
It’s always beneficial to revisit your own ﬁnancial plan after a signiﬁcant change, but it’s a better time before change happens. Take the time to make sure your financial aﬀairs are in order. Try putting yourself in your predecessor’s shoes if you’re on the receiving end of the wealth transfer. How would you want the experience to go? What would you want your beneﬁciaries, heirs or legatees to know beforehand?
4. Know the legal and tax consequences in your respective state.
One should consider the tax and legal consequences of inheriting assets at both the federal and state level. Twelve states have an estate tax separate from the federal estate tax, and six states have an inheritance tax. These taxes can result in less being passed on.
Diﬀerent assets and asset ownership types have diﬀerent treatments. For example, investment accounts are typically more straightforward than real estate or ownership in private businesses. Another example is the nine states that have community property laws, which means that for married couples in these states, any assets acquired after marriage belong to both spouses equally. Such laws further complicate the potential distribution of assets and are another reason to plan for inheritance early.
5. Don’t count your eggs before they hatch.
No matter how likely the inheritance is, making major decisions based on anticipation of what’s to come is not a wise strategy. You don’t necessarily want to decide on retiring earlier than planned because of an inheritance that pushes you over the ﬁnish line. Depending on your situation, it may make sense to factor an inheritance into your retirement plan, but it’s best to be conservative with your expectations. If you make a decision based on possible outcomes, you could be in trouble if they don’t happen. If you wait to make a decision and the anticipated outcome happens, you still win.
A few reasons not to make a premature decision are:
- Probate costs – probate costs can take a signiﬁcant amount out of an estate before it reaches beneﬁciaries.
- Creditors – creditors have a right to collect, and a good time for them may be upon passing of the debtor.
- Taxes – there may be estate taxes, inheritance taxes or even unpaid taxes from prior years, all of which Uncle Sam has the right to collect.
- Medical costs – medical costs can be incurred up until the last days of someone’s life. Although government programs like Medicare can cover certain end-of-life care expenses, these final medical costs can go unaccounted for or underestimated and can result in a lower estate value.
- Owner may change their mind – even if someone promises to pass on wealth, they can choose to allocate the wealth elsewhere or spend it all without you knowing.
- Value of assets decrease – if someone has their wealth tied up in capital markets, that wealth is subject to precipitous drops. Assets in the stock market can lose 10% in a day, and real estate assets can have their value cut in half in a matter of weeks. Although markets typically rebound after such declines, no one has a crystal ball to know when exactly these events will happen.
6. Seek help from a professional, wherever necessary
If you don’t know how to prepare for or handle an inheritance when it comes, it may end up being worth little to nothing. Professionals in law, accounting and ﬁnancial planning who specialize in this situation can offer their experience and knowledge. Even if you’re well versed in these areas, you may benefit from an outside party’s guidance as family wealth transfers can become complicated. Reach out to your advisor if you have questions about ensuring you are prepared to receive an inheritance.
If you are not currently working with an advisor, we would love to help answer your questions on inheritance planning. Please schedule a short phone call or virtual conversation with our Client Development team.
For informational and educational purposes only and should not be construed as specific financial, accounting, legal or tax advice. Certain information is based on third-party data and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-23-6138
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