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Preparing for your inheritance

Don't expect sympathy when you have a problem everyone else wishes they had. The "problem" is inheriting money.

Over the next 20 years, an estimated $10 trillion will pass from one generation to the next in this country as Depression-era parents pass their estates on to their baby boom offspring. But suddenly inheriting a chunk of money, whether it's $5,000 or $5 million, can cause problems if the person receiving it isn't emotionally or financially prepared.

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Suppose you're fairly sure you're going to inherit something when your parents pass away. Talking to your parents about your inheritance can be more uncomfortable than talking to them about sex -- but it's just as important.

"I would say 90 percent of the problems people have regarding an inheritance could be solved if they had a conversation with their parents when they were alive," says Dan Rottenberg, author of The Inheritors Handbook.

"Technically and legally, what your parents do with their money is none of your business -- and for that reason some children never raise the subject."

Rottenberg suggests it's in the parents' best interest to have the conversation because, presumably, they want the best for their children and they want their legacy well tended.

What you don't know can hurt
Barbara Blouin wishes she could have had that talk with her parents. She was told to sign some papers and, in effect, she signed her rights away. She was left with a very rigid trust that gave her access to income at the discretion of a trust officer. Years later she succeeded in breaking the trust over a tax issue but she says that was just part of the reason she wanted the trust broken.

"I didn't want to be treated like a dependent child anymore. I didn't want to be controlled anymore. I was really angry -- angry at a dead parent."

How to initiate the conversation
How can you talk to your parents about an inheritance without sounding greedy or morbid? You're in luck if your parents bring it up first. If they don't, Rottenberg has some suggestions.

"Draw up your own will and give a copy to your parents. Ask them for insight," says Rottenberg. "That gets them into the conversation and you can then ask if they have a will."

You can do the same thing by writing your own financial plan -- list assets, liabilities and the locations of important papers. Share that information with your parents. It gives them insight into your financial condition and may open the door for dialogue about their plans.

Another angle Rottenberg says can sometimes get the conversation going is talking to your parents about your wishes should you become incapacitated.

When to will
If your parents are willing to discuss your inheritance and you find they've only written a will, you may want to check with a financial adviser to see if the money would best be placed in a trust. Wills go through probate, a legal procedure to ensure the will is valid and establish ownership of assets. Probate takes time -- often a minimum of eight months regardless of how simple the estate may be, and costs money -- 10 percent or more of the estate.

Chris Cooper, a certified financial planner based in Toledo, Ohio, says wills are good for people who don't have property that needs to be probated -- in other words, property to which they have clear title.

"They have an individually owned house, stocks and bonds. They have annuities and IRAs that name beneficiaries. They don't have a taxable estate and they don't have beneficiaries with special needs who are minors or disabled. And they don't have the potential for fights or squabbles among beneficiaries."

The trust option
If your family doesn't fit in that category, see if your parents will consider creating a living revocable trust. It's called "living" because it's created while your parents are alive. Revocable means your parents are in control of the trust while they're alive and can make whatever changes they want. The word "trust" means that a "place" has been created to hold the assets.

If both parents are alive, they each create a trust that remains in their control until they die. As Chris Cooper puts it, the person who creates the trust is the holy trinity.

Know who to contact

Finding out how much money is being left to you isn't the most pressing issue after your parents pass away. Who to contact is. So make certain you know:

  • The names and phone numbers of their attorney, accountant or financial adviser.
  • Where their important papers are kept. If they're in a safe-deposit box, ask if you can be a co-signer and have access to the box.

"You're the grantor -- the creator of the trust. You're the trustee -- you control the trust, you hold legal title to the property. You're the beneficiary -- you receive the benefits of the trust."

When a parent dies, that trust becomes irrevocable -- no changes can be made unless the trust is broken -- a legal process that isn't taken lightly.

Typically, each parent names the other as beneficiary and names an adult child as successor trustee. That means that when the first parent dies their entire estate passes to the surviving parent, but it is managed by the successor trustee -- the adult child. This puts the child and the surviving parent in a strange situation because, generally, the parent has to come to the child when the parent wants to withdraw assets.

This scenario will work only if there's a good relationship between parent and child. In most cases, there will be a clause in the trust allowing the surviving parent to name a new trustee in case the parent-child relationship has gotten rocky.

The case for trusts
Cooper says there are several solid reasons for placing assets in a trust:

  • Stewardship: Controlling how quickly a beneficiary receives the money. "You may have beneficiaries who it may not be appropriate to receive large sums of money -- minors or even people under 30. When you're young and you haven't even learned job skills and all of a sudden you have a half-million dollars, it's like, 'Hell, I don't have to work, I don't even have to think.' Pretty soon it's all spent. Accident settlements are usually blown in 16 months. It's a sad commentary but people can't handle money. Just as a parent had time to acquire it, a child needs to go through the same process."

  • Taxes: When an estate is greater than $1 million (the amount exempt from federal taxes) and mom and dad are both living, they can pass twice as much tax-free if they use a trust. (Beginning Jan. 1, 2004, $1.5 million of the estate will be exempt from federal taxes. The amount will increase to $2 million in January 2006.)

  • Probate: "If you put the property in a trust when you're alive it doesn't have to go through probate." Cooper points out that there are things that shouldn't go into a trust, such as rental property with losses, so make sure to discuss that area with a financial planner.

  • Privacy: "Probate is public court -- anybody can read it. With a trust no one knows what you did with your estate."

It usually costs from $1,000 to $2,500 to set up a trust. The document itself is drawn up by an attorney, but Cooper advises seeing a certified financial planner first to set the details.


-- Updated: Nov. 14, 2003




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