What to Know about Inheritance

Handwerk Consulting |

The amount you save and spend, the retirement plans you choose, and how you take eligible retirement plan distributions are all influenced by whether you expect to leave an inheritance to your children. However, there are certain important personal financial factors to consider beyond your wish to leave some wealth to your offspring (or not).

It’s easy to get caught up every day; thinking about what we’ll leave behind when we pass away isn’t usually on our minds. When we do take the time to think about leaving a “legacy,” it’s usually restricted to creating a will and dividing up assets. But there’s more to leaving a lasting legacy than just money. Will your gift provide security for your child for years to come, or will it be a jumble of assets, liabilities, and muddled records that will take years to figure out?

Parents are constantly on the lookout for new methods to support their children. You might wonder how you might assist in providing for them after you’ve passed away, and many parents solve this problem by setting up an inheritance. Depending on your budget, interests, and the age of your children, you can choose from a variety of inheritance choices.

It is also essential to think about your children’s values you want to leave. That would be your most significant legacy.

Our children must learn the value of others in their lives to be successful. We must teach that healthy, helpful, and effective relationships are essential to happiness and success.

When we teach our children to approach problems with a positive mindset, they are more likely to participate in the creative process of investigating and designing alternative paths up the mountain. Solution-oriented thinking protects our children against defeatist thinking. Our responsibility is to teach children that if they are unable to discover a solution, they must open their minds, seek advice from others, and implement fresh ideas and proposals until all barriers have been removed and the problem has been solved.

Legacy is not only monetary; it is the values you leave to your children that will accompany them their whole life.

Inheritance is your chance to talk to your children about what you want for them in the future.


Things to keep in Mind

Plan for Healthcare:

Unexpected illness and exorbitant healthcare bills are the biggest threats to your retirement income and your children’s inheritance. When it comes to paying for nursing homes and other forms of long-term medical care, government programs are frequently ineffective. Medicare only covers a portion of nursing home care, and Medicaid requires you to spend nearly all of your own money before receiving long-term care.

Consider the Tax Implications:

If you anticipate receiving assets from your parents, you may be in a better financial situation than someone who does not anticipate receiving an inheritance. Keep in mind that certain inherited assets, such as stocks and mutual funds, may qualify for a step-up in basis, which provides tax benefits. If you’re leaving assets to others, this tax treatment could save your heirs a lot of money.

Choose Your Investments Wiser:

Those with big estates should anticipate their children to pass inherited possessions on to their grandchildren. With investments like growth and income equities and a laddered bond portfolio, a portfolio built to survive multiple generations should grow, preserve wealth, and create income.

Consider growing prices or inflation, as well as years of compounding investment gain, when calculating the amount of inheritance you will give to your children.


What to Know About Estate Planning

In the absence of an estate plan, your death will be classified as intestate, which means you died without a valid will in place. Probate, which can take anywhere from 6 to 9 months or perhaps several years without appropriate planning, will determine who inherits your property in the state where you lived.

In addition to the lengthy process, your heirs may face high fees, predatory claimants, and a loss of control over the disposition of your estate. Probate might cost anything from 3% to 7% of the overall value of your estate. And, because this process is public, it’s possible that envious creditors or estranged relatives would try to claim a piece of your fortune.

Good estate planning mitigates these dangers and gives your family a secure plan for transferring your wealth. Your estate planning attorney and financial advisor, for example, can become valued resources for your family to draw on during this difficult transition.


Types of Inheritance

Trust Account

A trust account is one of the most prevalent solutions among parents who want to leave an inheritance to their children. When you die, your life insurance policy proceeds can be deposited into an irrevocable life insurance trust account.

The trust account is used to pay for life insurance premiums, and you have control over when and how the monies are allocated to your children. You can, for example, specify that the trust proceeds be used to pay for university tuition or that payouts be made at certain ages, such as 18, 24, and 30.


Gift Assets

Giving assets to loved ones is one approach to allow them to use your money while you are still living. Gifts that qualify for the annual exclusion from gift tax—commonly referred to as “annual exclusion gifts”—are completely tax-free and do not necessitate filing a gift tax return.

Each person you give a gift to is subject to a separate annual exclusion. For 2022, the annual gift tax exception is $15,000 and $16,000, or respectively.

While gift recipients will not receive a cost-basis step-up, any capital gains will be taxed at their current rate, which may be lower than yours.


Defer Income

Taxes on capital gains, interest, and dividends from investments are deferred in retirement accounts like deductible IRAs and 401(k) plans until the money is withdrawn and taxed as ordinary income. A non-deductible Roth IRA permits earnings to build tax-free and withdrawals are tax-free if you expect to be in a higher tax band in retirement than you are now.


Life Insurance or Tax-Deferred Variable Annuities

Your beneficiaries will get the proceeds of your life insurance policy tax-free, without having to go through probate or worry about stock market swings. Fixed or variable annuities have a life insurance component and allow you to participate in the stock market through mutual funds or fixed-income investments. However, because these policies frequently include hidden costs and fees, it’s critical to shop about and thoroughly review them.

If you haven’t evaluated your estate plan, or if you haven’t developed one yet, now is the time to do so. Please do not hesitate to contact us if you need assistance.