How to Adapt Your Estate Plan for a Major Inheritance
Planning for and After an InheritanceThe “great wealth transfer” is underway. Over the next few decades, Baby Boomers will pass on $30 trillion in assets to younger generations. 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 considered how this will affect your own estate planning?
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? |
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1. Understand the Rules, Especially About Estate Tax
The good news is that you do not have to pay income tax on inherited assets, regardless of the amount. The bad news is that a substantial inheritance may change your estate planning needs by bringing you closer to- if not over- the $2 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 $2 million mark. It is important that you work with someone to minimize the estate tax burden on your heirs, which could cost your estate tens of thousands of dollars or more if you do nothing.
2. Keep an Open Dialogue About Assets Before Inheritance
If the inheritance you are expecting is from your parents, you may be familiar in general with the assets they hold. If it is possible, consider having conversations with them while they are alive about the nature of those assets and how they will pass. The process of sorting out probate and non-probate assets in the aftermath of a parent's death can be confusing and overwhelming, even for people who think they are educated and prepared. Knowing ahead of time what you will have immediate access and what must be processed through Probate Court can ease this process. Specific topics you may want to cover:
- For life insurance policies, the location of the policy documents, names of beneficiaries, and benefit amount;
- For investment portfolios (including retirement accounts): the location of account documents and names of beneficiaries, if any are identified;
- For real property, the names listed on the current deed and location of any existing mortgage or home equity records to help determine the equity in the property.
3. Assemble Your Team of Professionals
There are three professionals that you can rely on for assistance, both with the aftermath of your loved one's death and your own planning: an estate planning and probate 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?
An estate planning and probate attorney applies their knowledge of tax and inheritance laws, helping you navigate the probate process for your loved one and providing specific strategies to save you money and ensure your assets are handled according to your wishes.
Finally, an accountant can help you deal with the estate accounting and make sure that your own planning maximizes any tax advantages available to you and your family.
A financial advisor can help you look at the big picture – how will your inheritance help you accelerate towards your previously determined goals?
An estate planning and probate attorney applies their knowledge of tax and inheritance laws, helping you navigate the probate process for your loved one and providing specific strategies to save you money and ensure your assets are handled according to your wishes.
Finally, an accountant can help you deal with the estate accounting and make sure that your own planning maximizes any tax advantages available to you and your family.
4. Assess Your Own Financial Picture
It is important to assess your own financial picture before you begin your own planning process. The first question is, 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. You may have debt you can pay off that will save you interest expense in the long run. Be realistic with this assessment, and do not be afraid to discuss with your financial planner. 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.
A second question is whether you are on track with your own retirement savings. Before you move new assets out of reach for estate planning purposes, you should be sure that you do not need to allocate some of those assets to your retirement savings.
Finally, consider where your children are in life and what major expenses are still ahead 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. If some of these expenses are still in your future, you may want to reserve funds to cover them before encumbering them in your estate plan.
A second question is whether you are on track with your own retirement savings. Before you move new assets out of reach for estate planning purposes, you should be sure that you do not need to allocate some of those assets to your retirement savings.
Finally, consider where your children are in life and what major expenses are still ahead 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. If some of these expenses are still in your future, you may want to reserve funds to cover them before encumbering them in your estate plan.
5. 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.
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.
How We Can Help
At slnlaw, we specialize in helping you navigate the complexities of estate planning during significant life changes. Our experienced estate planning attorneys work with you to create a comprehensive strategy tailored to your unique needs. From minimizing estate taxes to setting up trusts and ensuring your legacy is preserved for future generations, we provide the expert legal guidance you need to make informed decisions and secure your financial future. Let us help you turn your inheritance into a lasting legacy. You can use the button below to schedule a free information call, or give us a call at (781) 784-2322.
Meet Our Estate Planning Lawyers
Emily Smith-Lee is the owner and founder of slnlaw. She is a 1996 graduate of Boston College Law School. She was previously a partner at the Boston office of a large international firm, where she worked for thirteen years before starting the firm that became slnlaw in 2009. She has been recognized as Massachusetts Superlawyer each year since 2013, and in 2018 earned recognition as one of Massachusetts Lawyers Weekly's Lawyers of the Year.
Jenna Ordway: Jenna is a 2013 graduate of Quinnipiac Law School, and also earned an LLM in Taxation from Boston University in 2015. She has been affiliated with slnlaw since 2011, first as a law clerk and then as an attorney. Jenna has been recognized since 2019 as a "Rising Star" by Massachusetts Superlawyers. Jenna wrote a book on estate planning: The Road to Peace of Mind: What You Need to Know About Estate Planning. Jenna has helped many individuals and families with planning to protect their legacies and loved ones, and planning for the future and succession of their businesses.
Sharleen Tinnin: Sharleen is a 2010 graduate of Northeastern University School of Law, and earned her LLM in estate planning from Western New England Scool of Law in 2016. She has been with slnlaw since 2023. Prior to joining slnlaw, she worked with King, Tilden, McEttrick & Brink, P.C. on complex civil litigation matters. She previously worked for the United States Department of Justice, and received an "Excellence in Justice" award in 2017. Sharleen has helped many clients with planning for their legacies and their future, and navigating the probate process in Massachusetts after the death of a loved one.
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