Things You Need To Consider Before Passing On Your Inheritance

Inheritance

There is no one-size-fits-all solution for passing assets on to your heirs. What are the benefits of establishing trust? Do you think you should give assets away now rather than wait until you die?

Many factors influence the answers to these questions. You may want to consider whether you want to control how your heirs use their inheritance, whether you are married or have minor children, and how much your estate is worth.

We’ve outlined a few inheritance methods to consider, along with some things to keep in mind when making your decision. Remember that your decisions can have significant tax and financial repercussions; for instance, estate taxes can apply to your beneficiaries if your estate is worth more than $5 million (this value rises with inflation each year).

Always consult your estate attorney, financial advisor, or tax advisor for guidance on your particular situation.

1. Trusts

Creating trusts can assist parents and guardians in securing the financial well-being of their children and, at the same time, serve as a valuable tax and estate planning tool. It is not just for wealthy families; families of all income levels can benefit from trusts.

Most trusts are created for children whose parents die before they turn 18. Trustees often use these trusts to cover the children’s expenses until they age.

A child often gains control over their trust when they turn 18. Based on your last will and testament, you can also decide to give some amount to your child after they graduate from college or reach some other milestone.

For a thorough guide on what is a last will and testament, click on the link. 

There are several types of trusts. Their purposes may vary depending on how they were set up. In some trusts, beneficiaries are protected from creditors, or tax burdens are minimized. 

Having a large estate and wanting to minimize taxes can make trusts especially beneficial. Depending on your circumstances, a tax planner, an estate attorney, or a financial advisor may be able to provide you with more information on other types of trusts. A charitable trust, a family trust, an insurance trust, or a living trust can all be used in this way.

2. Financial gifts while you’re living

You might want to consider financial gifts to your heirs immediately if your estate is worth at least $2 million and you are on track with your financial goals. Gifts of a larger value can help you manage tax implications. It will also allow you to observe how much they cherish and value the gift.

It is tax-free to give up to $14,000 to one or more individuals each year. According to the IRS, this is called an “annual exclusion.” Direct payments to educational and medical providers are exempt from taxation and cannot be included in your annual exclusion figure.

However, remember that when you have less than $2 million in assets, you might consider putting current assets into your retirement account instead of giving them away.

3. Special needs trusts

It is possible to protect Medicaid, Social Security, and other government benefits for a loved one with a disability with a special needs trust.

When forming a special needs trust, you must familiarize yourself with several complex rules, which could result in disqualification from governmental programs. Special needs trusts should be handled by a professional who is knowledgeable about them.

4. Non-probate assets

The assets not subject to probate are transferred directly to the beneficiaries without any process. Some examples are:

  • Assets with a named beneficiary include life insurance, retirement plans, or pensions.
  • Joint tenants’ assets with survivorship rights.
  • The community property assets that your spouse inherits.

Whether your assets are on a non-probate or probate timeline, it is possible to coordinate them with the help of your estate lawyer, financial advisor, or tax consultant. This coordination can also help manage a beneficiary’s total gift tax implications.

Considerations about Passing an Inheritance to Children

When you decide to leave an inheritance to your children, you will need to consider how much you save, where you invest, and what you do with your retirement plan distributions. Regardless of whether or not you wish to pass some wealth on to your children, there are several important personal financial concerns to consider.

1. Consider how much income you need

Often parents neglect to consider their income requirements when giving away retirement savings. They must assess their needs before giving gifts to others. Retirement calculators can help estimate the necessary savings and withdrawal amounts during retirement.

Consider inflation and taxes when investing, and make sure your portfolio includes a mix of income and growth investments.

2. Healthcare costs are on the rise, so plan ahead

Health care costs and unexpected illness pose the most significant risks to your retirement income and your children’s inheritance. Government programs are often of little assistance when it comes to long-term medical care. There is limited Medicare coverage for nursing home care, and Medicaid requires you to pay for long-term care almost entirely out of your pocket.

If you transferred assets to a relative within a few years of your nursing home stay, you cannot qualify for Medicaid.

A long-term care insurance policy is a way to protect assets against catastrophic illnesses. It may be purchased individually, through an insurance agent, or a group plan at work. However, it is important to consider these policies carefully because they are very expensive and have many limitations.

3. Living beyond your retirement nest egg

Is it possible to outlive your retirement fund? Your children and grandchildren may celebrate your birthdays with gratitude when you are over 90. However, if you have used up your nest egg, they might also cover your bills. Retirement-plan withdrawals must be managed carefully to prevent asset depletion as your life expectancy extends.

If you want to ensure you receive a guaranteed amount for as long as you live, you can invest some of your retirement money in an immediate annuity. Some pension and retirement plans allow you to spread payments over a lifetime rather than receiving a lump sum.

4. Consider estate planning

Estate planning will help control the distributions. It helps pass specific assets to designated children, especially if you or your spouse have children from previous relationships.

If you have well-off children, they may prefer you keep every penny of your nest egg instead of passing it down. So you must discuss estate transfer with them. 

5. Make wise investment choices

When you have a large estate, you are likely to expect your children will pass on inherited assets to your grandchildren. Investments such as growth, income equities, and laddered bonds should be part of a portfolio designed to last multiple generations. Those who wish to leave an estate to multiple generations should withdraw only income and not tap into principal.

Consider years of compounded investment growth and rising prices or inflation when estimating the amount of inheritance you will leave to your children.

Conclusion

You may find setting up a trust or gifting assets an effective way to transfer assets, but it is not without its drawbacks.

Leaving an inheritance to your children impacts your retirement plans, savings, and distributions from your retirement plan. You should consider your income needs and potential healthcare expenses before deciding to leave an inheritance. Retirees must also consider the possibility of running out of money post-retirement. In addition, be sure to consider inheritances in light of any taxes that may be imposed. 

A tax advisor or attorney can help you determine which option makes sense based on the above suggestions.

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