retirement

5 critical questions before leaving an inheritance

What to ask before leaving an inheritance
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What to ask before leaving an inheritance © iStock

What to ask before leaving an inheritance

Although leaving your wealth to the next generation sounds like a worthy goal, many Americans struggle with how much to leave and how to do it.

In a recent survey of high net worth parents, 91% of respondents said they plan to leave most of their wealth to family members, while 46% are concerned about giving too much money, according to the report this year from Merrill Lynch's Private Banking and Investment Group.

The findings reveal that most people want to use their wealth to positively influence the lives of relatives. But 66% worry about the negative impact that gifted assets could have on an individual or group.

So, how much is too much to leave as an inheritance?

The answer, like many issues involving family and money, is not a simple one.

"The question of deciding how much to leave as an inheritance is a very personal one," explains Paul Jacobs, chief investment officer at Palisades Hudson Financial Group in Atlanta.

Here, experts offer factors to consider when deciding how much to leave in an inheritance, and the best ways to pass along wealth to family.

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What is your financial position?

What is your financial position? © iStock

In the U.S., about $30 trillion will be left to family members during the next few decades, according to consulting firm Accenture.

However, when determining how much is right for your personal situation, it pays to first know where you stand and what lies ahead.

"Before you leave an inheritance, you have to make sure your retirement income needs and retirement goals are met," says Keith Klein, CFP professional with Turning Pointe Wealth Management in Phoenix.

This involves more than just glancing at figures. You'll need to evaluate priorities for the next few years, which might include traveling, spending time with family, starting a new venture or donating to a charitable organization.

Health care needs also are essential considerations. "We are living much longer these days, and medical costs are going up," Klein says.


What are the recipients' situations?

What are the recipients' situations? © iStock

When designating funds for beneficiaries, "age and health are really important," says David Pessin, an attorney with Pessin Katz Law in Towson, Maryland.

If the heir is a minor, you may want to set up a way to distribute wealth over time. Through a trust, you could appoint a trustee to oversee funds and determine how much is needed for education and support.

You may need to write in particular provisions if the beneficiary is disabled or has special needs. First and foremost, you'll want to make sure the inheritance is available but won't disqualify the person from receiving public benefits, such as Supplemental Security Income, or SSI, and Medicaid.

When leaving an inheritance, consider heirs who have managed their finances wisely for decades; they'll likely do the same with the money you leave them.

"Look at track records in terms of financial responsibility," Pessin says.

If, however, there is a history of large debts or bankruptcy, "that's a huge red flag," he says. It may not only indicate a sign of poor financial decisions, it could put the beneficiaries at risk of creditors looking to sweep up a large amount they receive.


What are the risks?

What are the risks? © iStock

When setting specific figures, "consider how the inheritance will affect the beneficiary's life," says Patrick Stanley, an attorney with Comitz Beethe in Scottsdale, Arizona.

In the Merrill Lynch survey, when respondents were asked at what point an inheritance or gift is considered too much, 46 percent said it happens when the amount causes a disincentive to achieve one's full potential.

Ask these questions when setting limits on inheritance:

  • Do your heirs have a mountain of debt?
  • Do your children live within their means, or regularly overspend?
  • Do they have drug, alcohol or gambling problems?

If these issues aren't under control, it's likely your money will be at risk.


How can you pass on your wealth?

How can you pass on your wealth? © iStock

Consider these vehicles as a way to pass on wealth to loved ones:

  • Life insurance: "The most economical way to leave an inheritance is always through the use of life insurance," Turning Pointe's Klein says. Maintaining a life insurance policy into retirement lets you spend other assets and still pass along funds to beneficiaries.
  • A trust: Trusts are legal arrangements that allow you to hold and pass on property and assets to beneficiaries, such as family members. You'll also designate a trustee to manage the trust.

    A key advantage of a trust is that it does not pass through probate, the legal process that ensures your debts are paid and assets distributed after you die. Probate can be expensive and time-consuming.

    "The trust can make annual income distributions to the beneficiary and can also make larger distributions of principal at certain ages," Palisades Hudson's Jacobs says. For example, half of the trust's principal could be distributed at age 30 and the remaining trust principal at age 40.

  • Cash gifts: Federal gift-tax rules allow you to gift up to $14,000 to as many people as you wish each year without tax consequences. If your beneficiary is struggling financially, monetary gifts could be given as advances on a future inheritance, says Stanley of Comitz Beethe.

    Also, opting to give gifts during life can help reduce potential estate taxes later.


How do taxes figure into the equation?

How do taxes figure into the equation? © iStock

The federal estate tax exemption stands at $5.43 million. It allows many to avoid federal estate taxes. "However, several states also levy an estate tax and have lower estate tax exemptions than the federal amount, which can lead to an unexpected and substantial tax upon death," Jacobs says.

For this reason, ask an attorney and financial planner for input on ways to minimize taxes if that's a priority for you and your family.

Even after establishing a plan, you'll need to periodically review it. "The estate tax rules have changed frequently over the last 15 years, and they are likely to change again in the future," Jacobs says.

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