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Planning for an inheritance – Don’t Overlook These Important Steps

Planning for an inheritance – Don’t Overlook These Important Steps

May 22, 2024

As the Baby Boomer generation reaches its golden years, many are contemplating how to leave a lasting impact on their families. This goes beyond simply naming beneficiaries; it's about ensuring your legacy is used wisely and supports the future of your loved ones.

Give Instructions on how to spend it

The majority of us will one day leave something to our heirs, but it’s usually something like “Each of my children gets and equal portion of my estate.”  As a result, some will spend it on a nice car, a vacation, pay off bills or whatever they feel like makes sense to them.   This could be just fine with you, but what if you believe there is a better way?  You may not want to force your child to donate some of their inheritance to charity, but you might suggest it.  You may be surprised to find that they will.   Give some consideration to leaving some suggestions, your children will appreciate it.

What happens after you pass?

Once we are no longer here, we can’t tell people what our contingency plan would have been.    For example, if you pass at age 65 your spouse may remarry.  What would happen if you leave all of your money to your spouse and then they pass before their second spouse does?  Would that potentially mean your children inherits nothing?  It certainly can play out that way.   The surviving spouse could leave all of their assets (including yours) to their children, cutting yours out.

Effective strategies exist to avoid this from happening and you want to make sure you talk with your favorite estate planning attorney to protect your family accordingly.

Planning for the Unexpected: Safeguarding Grandchildren's Inheritance

What happens if you go to a sporting event with your daughter and on the way home you are in a tragic accident and neither of you survive.  If your will states that your assets are to be divided up between your children, then you now have 2 children who survive you as opposed to 3.  You may have just disinherited your grandchildren, because now 50% of your estate might go to each of your children that are alive.  A simple language change in your will can make sure that your daughter’s family gets 1/3 of the estate in this situation rather than her family receiving nothing.

Tax Cost

Of course, I would be remiss not to point out the benefits of reducing your taxes through comprehensive planning.  I don’t know anyone that wants to leave a financial gift to the IRS.  There are a number of tax strategies that will allow you to keep more of your money and give less to Uncle Sam.

Gifting is an important strategy that many overlook.  When I was going for my Masters in Tax, one of my professors did estate planning for high-net-worth individuals and she found that the most frustrating thing was people’s unwillingness to distribute their estate to their children and grandchildren for fear of needing the money.  The thought of borrowing money from those who they wanted to give their money to was too hard to swallow.  As a result, they gave more of their money to the government.  You can gift up to $18,000 to every individual you know and there are strategies to distribute more as needed. If you have 3 married children and 6 grandchildren you have 12 family members you can give money to each year.  That’s $216,000 per year you can give away tax free.  Do that for 10 years and see how much you can get out of your estate!

Consider your tax bracket compared to your heirs'. You might be in a lower tax bracket than your working children. Taking calculated withdrawals from your retirement accounts, with the guidance of a financial advisor, could be advantageous. For example, strategically converting some traditional IRA funds to a Roth IRA before retirement can provide tax-free withdrawals for your heirs in the future. Consulting a financial advisor can help you develop personalized strategies to minimize taxes on your estate and maximize the amount your heirs ultimately receive.

Beyond the Basics

Additional Considerations:

  • Digital Assets: With the rise of digital assets like cryptocurrency and online accounts, ensure your plan addresses how these will be managed and transferred to your heirs.
  • Business Succession: If you own a business, consider incorporating a succession plan to ensure a smooth transition after your passing.
  • Special Needs Considerations: If you have a loved one with special needs, a special needs trust can be established to ensure their continued care without jeopardizing their eligibility for government benefits.

By taking a thoughtful and comprehensive approach to inheritance planning, you can create a lasting legacy that supports your loved ones' financial well-being for years to come.