When You’re Expecting an Inheritance

WHEN YOU’RE EXPECTING AN INHERITANCE

The “great wealth transfer” is underway. Over the next few decades, Baby Boomers will pass on $30 trillion in assets to Generation X and Y. If you’ve talked to your older loved ones about estate planning, you may have an idea of the scope of the assets that will wind up in your hands eventually. Have you calculated how this will affect your own estate planning?

Many members of Generation X are in their mid to late forties and fifties and are beginning to make estate planning a priority. You may have already drawn up a will and named your personal representative. But you likely only documented how you’d like your currently owned assets handled. What if there is a future windfall that completely changes your financial picture? How will this affect your estate plan and what should you do?

1. Understand the Rules, Especially About Estate Tax

The major way in which an inheritance is likely to change your estate planning needs is that it will bring you closer to- if not over- the $1 million threshold for Massachusetts estate taxes.  If you made your will when you first started your family, you likely had limited equity in your home and had not accumulated a lot of value in your retirement savings.  Now, you may have several hundreds of thousands of dollars in equity, a growing stock portfolio in your retirement account, and  life insurance as well.  Add a substantial inheritance, and you may well have crossed the $1 million mark.  It is important that you work with someone to minimize the estate tax burden on your heirs, which could cost your estate $36,000 or more if you do nothing.  

2. Assemble Your Team

There are three professionals that you can rely on for assistance: an estate planning attorney, a financial advisor and an accountant.

A financial advisor can help you look at the big picture – how will your inheritance help you accelerate towards your previously determined goals? Next, an estate planning attorney applies their knowledge of tax and inheritance laws, providing specific strategies to save you money and ensure your assets are handled according to your wishes. Finally, an accountant can help you make sure all of your present filings are in order so you’re not surprised with a major tax bill.  

At slnlaw, we like to think we’re more than just estate planning attorneys. We help you look at your assets and finances from a 10,000 foot view, but we also provide the up-close expertise needed to preserve your resources. We have your best interests in mind. If you don't already have a financial advisor or an accountant, we are happy to make an introduction to one of our trusted referral partners who can work with us to make sure you have what you need to protect your assets and your family.


3. Ask the Right Questions

Once you’re in front of the right professional, it’s time to make decisions. In order to make sure these decisions are ones you won’t regret, ask yourself the following important questions:

How much of this inheritance do you need right now?

The answer will vary based on your age, income and net worth. You may want to use it to fund a child’s college education or retire earlier. Consider how the inheritance can help your current situation.
What is the actual value of all of your assets?

First, figure out how you’re going to meet the goals you’ve set with your current assets, then calculate how the inheritance can help you get there. One of the reasons why seven out of 10 people will spend their entire windfall is because they use the inheritance as leverage for a lifestyle inflation, such as using the money as a down payment on a property with a mortgage they can’t afford.

Are you on track with your retirement savings?

Before you move assets out of reach for estate planning purposes, make sure you are on track with your retirement savings.

Where are your children in life and what major expenses are still ahead of you?

How you manage a new influx of assets will depend on what is still in front of you.  If you are done paying for your children's education and other big ticket items like weddings, and you are relatively secure in your retirement, it may be time to start thinking about putting some assets out of reach to protect them from both taxes and the costs of long term or nursing home care in the future for you or your spouse.

4. Plan Your Own Legacy

The inheritance you receive represents someone else's legacy that they worked hard to accumulate and preserve, then made plans to pass on to you.  It is your turn to do the same for the ones you love.  The  inheritance you receive may include something important to your family that you want to protect for your children- a family business, a family home or vacation property, or some other asset that has been preserved through multiple generations.  Now is a good time to consider how to safeguard that asset, which could include putting it in a trust.  If there is something in your legacy that matters to your family, you also want to make sure your heirs are not put in a position of selling or liquidating assets just to pay estate tax.  Remember that If your inheritance adds significantly to your net worth, it may push you over the estate tax exemption. By setting up a trust to bequeath funds to family or charity, you will protect your estate from tax penalties and ensure your beneficiaries are in the best position possible after your passing.

Finally, when you or your spouse receive an inheritance from your parents, it is frequently a great learning opportunity for you and your children.  Talking with your family about your parents' legacy and what it means to you is also an opportunity to educate your children (assuming they are old enough for this conversation) about what you are planning.
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In all of the above, consider slnlaw LLC your trusted partner when navigating estate planning after an inheritance. Contact us today to set up a free consultation with our team.

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