An inheritance involves several important considerations, both for those who are transferring wealth and for the recipients. With U.S. households projected to transfer $72.6 trillion in assets to heirs over the next two decades, according to Cerulli and Associates, the so-called “great wealth transfer” will affect a growing number of Americans. Because all estates and families are different, the distinctive aspects of both will play the biggest role in determining how the transfer of wealth should be handled.
No matter the size of the estate, a benefactor should follow some basic estate planning guidelines. It is imperative that documents and matters are in place to have a seamless transfer, including a will, up-to-date beneficiary designations, and a revocable trust.
When creating these documents, it is important to consider family dynamics, as well as heir preferences, needs, and limitations. For example, if one child is in a low tax bracket and another one is in a higher tax bracket, does it make sense to leave certain assets (e.g., an IRA) to one heir over the other? Will heirs who receive a vacation home collectively share the house without arguments or will one want to be bought out? If a current spouse isn’t the parent of your children, how do you ensure that assets left to that spouse will get passed to your children when the spouse dies?
The key to an effective wealth transfer strategy is consideration and communication. It is important to discuss your plans, reasoning, and considerations openly with your heirs. Furthermore, it’s important for each heir to understand what their roles and responsibilities are regarding the estate administration and distribution. Discuss with them if they have the time, temperament, and training to take on that role. For example, you may want to name one brother as the trustee of a testamentary trust for the other brother. Talk to the potential trustee about whether he wants this responsibility, or if he is uncomfortable with the idea of being his “brother’s keeper.”
To help address these issues, a family wealth mission statement may help ensure family harmony during a wealth transfer. These documents focus on your values and insights, helping to steer your legacy for generations to come.
The considerations associated with wealth transfer aren’t limited to the benefactors. Heirs, too, have a responsibility—especially when it comes to thinking about their own wealth-management plan.
Among other issues, heirs should consider how the inheritance impacts their financial and estate planning goals and investment plan. There may be potential new income and estate tax implications as well. Does the inheritance push the value of your estate above the estate tax exemption and/or advance you to a higher marginal income tax rate? Does the inheritance present an opportunity to retire early or purchase a vacation home? Does the inheritance allow you to participate more actively in philanthropy?
Other issues may crop up unexpectedly. For heirs who are on Medicare, will the inheritance increase your income to make you subject to Income-Related Monthly Adjustment Amount (IRMAA)?
In all cases, it is paramount to review your own wealth and estate plans and think strategically about how best to optimize your financial and familial situation. This may be the time to consult with a financial planner or other investment professional.
In situations where it is impossible to remove emotions from decision-making, you may want to consider using neutral third parties, such as property managers, professional estate sellers, or real estate agents. Remember, court battles can be long, expensive, and cause lasting and irreparable family strife.
There’s little doubt that an inheritance carries mixed emotions for both the giver and the beneficiary. But just like with any family financial decision, a measured and thoughtful approach will contribute to a bespoke, tax-efficient, and mindful outcome.
