Passing an Inheritance to Your Children: 8 Important Considerations

December 30, 2022

Choosing to Leave an Inheritance Can Impact Many Other Financial Planning Decisions

If you have worked hard and planned properly, you may be well situated to leave an inheritance to your children. It can feel very meaningful to be able to provide a financial legacy for your loved ones, but it’s important to be practical, too, and to go about your estate planning in the right way. This single decision can impact all of your financial decisions, such as how much you put into savings, the types of retirement accounts you utilize, and your strategy for taking distributions.

Make sure you’ve covered all your estate planning bases by reading through these eight considerations for passing an inheritance to your children.

1.      Your Personal Income Needs

Generosity feels good, but it must be wise, too. Don’t make the mistake of giving away more of your retirement savings than you’re truly able to. While the decision to provide for your children can be a very emotional one, it’s important to be financially savvy about it. Determine your own monthly or annual income needs, then use a retirement calculator like this one to help you develop a savings and withdrawal plan.

2.      Rising Healthcare Costs

It’s important to remain vigilant about planning to pay for an unexpected illness or injury – and the medical bills that come with them. These costs pose a risk to your retirement and to your heirs’ inheritance, and there’s no good way to predict how much you could need. It’s also risky to rely on government programs like Medicare and Medicaid because they don’t cover everything. One potential option to explore is long-term care insurance. It offers protection for your assets in the event of catastrophic illness. However, policies can be quite expensive and aren’t wise investments for everyone.

3.      Outliving Your Nest Egg

One of the most common retiree fears is running out of money in retirement. Make sure you have a plan to manage your savings and withdrawals appropriately so you can avoid depleting your assets while you’re still alive. If your goal in estate planning is to leave an inheritance for your children, the last thing you want is to saddle them with paying your bills as you age.

4.      Tax Liability

When you leave an inheritance to your children, consider how best to protect them from significant tax liability. The choices you can make now can help them to enjoy more favorable tax treatment when you’re gone. For example, inherited stocks and mutual funds are eligible for a step-up in basis that could lead to significant savings.

Be mindful, too, about the rules for inheriting IRAs, such as the requirement that non-spousal beneficiaries take full distribution of the amount inherited within ten years. Formerly, heirs could take advantage of a “stretch IRA” that allowed them to stretch distributions over their entire lives. However, the stretch IRA was eliminated by the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019. Some exceptions to this remain for a child who is not yet 18, for those who are disabled or chronically ill, and for heirs who are less than ten years younger than the owner of the IRA

SECURE Act 2.0: What It Means For Your Retirement

5.      The Advantages of a Trust

Some estate planning tools can allow you more control when you want to leave an inheritance. A trust, for instance, will control distributions on behalf of your estate. This can help you ensure that specific assets pass to the children you designate them to. For this reason, a trust can be particularly useful for blended families where one or both spouses have children from previous relationships.

6.      Wise Investment Decisions

You should always choose your investments wisely, whether you hope to leave an inheritance or not. However, if it is your goal to pass inherited assets to your children, then you need to design a portfolio that will last for several generations. You want your investment portfolio to continue to grow, preserve capital, and generate income. You should also do everything you can to avoid dipping into the principal for withdrawals. When you’re estimating the amount that you’ll be able to use to leave an inheritance to your children, don’t neglect to consider both compound interest and inflation.

7.      Options for Carrying Out Your Legacy

Estate planning isn’t one-size-fits-all, and there are several options to choose from to leave an inheritance:

Gifts

If you choose to, you can gift assets to your children and allow to make use of your money before you die. If they qualify as annual exclusion gifts, they won’t be subject to the gift tax. This makes them completely tax-free and not subject to IRS filing. This strategy is also advantageous in that you can use a separate annual exclusion for each person to whom you make a gift. While your recipients won’t receive the step-up in cost basis, any capital gains will be taxed at their rate (rather than yours) which may be higher.

Trusts

Trusts are advantageous when you choose to leave an inheritance because they avoid probate, maintain privacy, and protect your heirs’ interests. You can select an individual or a company to act as your trustee to manage distributions according to your wishes. A revocable trust allows you to maintain control of the assets during your lifetime, while an irrevocable trust is treated as a gift that you cannot control or take back into your possession. Examine which type might benefit your estate planning goals.

Deferred Income

Certain retirement accounts, including IRAs and 401(k) plans, defer taxes on capital gains, interest, and dividends until the funds are withdrawn. When they are, they’re taxed as ordinary income. If you believe you will be in a higher tax bracket in retirement than you are in currently, you might look into using a non-deductible IRA. It’s a tool that allows earnings to grow tax-free, and there won’t be any taxes upon withdrawal either.

Life Insurance

Life insurance offers several estate planning benefits if your goal is to leave an inheritance to your children. If you have a policy, your beneficiaries receive the money tax-free. They won’t be required to go through probate, and there are no concerns about market fluctuations impacting the dollar amount. If life insurance is an attractive option for you, you might also consider fixed or variable annuities. They allow you to invest in the stock market through mutual funds, but they also have a life insurance component. Many times, they also carry hidden fees, so be cautious before taking this route. It’s usually best to discuss your options with a trusted financial advisor before you purchase an annuity product.

8.      Estate Planning Legal Details

After you determine the mechanics of your estate plan, work with an estate attorney or a financial planner who specialized in estate planning to ensure you have everything in writing. This also gives you a chance to ask questions about beneficiary changes, probate laws in your state, and whether you’ve included all necessary items in your will. You should feel comfortable and confident in the estate plan you’ve created to leave an inheritance to your children, so be diligent and intentional in getting all the information you need from the professional you’re working with.

If you think you would benefit from a conversation about estate planning and how best to leave an inheritance to your children, contact Lane Hipple Wealth Management Group at our Moorestown, NJ office by calling 856-406-5120, emailing info@lanehipple.com, or to schedule a complimentary discovery call, use this link to find a convenient time.

Illuminated Advisors is the original creator of the content shared herein. I have been granted a license in perpetuity to publish this article on my website’s blog and share its contents on social media platforms. I have no right to distribute the articles, or any other content provided to me, or my Firm, by Illuminated Advisors in a printed or otherwise non-digital format. I am not permitted to use the content provided to me or my firm by Illuminated Advisors in videos, audio publications, or in books of any kind.

Don’t Get Spooked by Estate Planning

September 26, 2022

Tackle Your Estate Planning Fears and Plan for the Future

Nothing strikes fear into the hearts of adults quite like estate planning, and it’s about more than the technicalities of creating a will or a trust. Estate planning brings up anxiety about the end-of-life, fear about what will happen to future generations, and concerns about how much weight the plan itself could hold over the course of your own life.

Certainly, it can be difficult to confront the what-ifs of the future, but it’s critical to plan ahead. Putting off an estate plan isn’t a viable strategy. If you’ve been hesitant, review the estate planning fears below and learn how to overcome them.

1.     Catastrophes and Tragic Accidents

We’ve all had irrational fear creep in from time to time, whether you’re scared of venomous snakes or terrified a train will hop off the rails. It won’t surprise you then that many people make an appointment with a professional before they take a flight, no matter how short or long.

Though crash landings could hypothetically occur, it’s incredibly unlikely. In fact, it’s far more common for someone to need long-term care or develop an end-of-life illness than to die in a plane crash. While revisiting or creating your estate plan is a good idea under almost any circumstance, fear of a freak accident shouldn’t be the only impetus. An estate plan includes health directives and assigns power of attorney – the right for someone to make financial or medical decisions on your behalf – which is important to have in place in a multitude of circumstances.

2.     Over-Considering Contingencies

Just like it’s unlikely a plane crash will cause your demise, it’s (thankfully) equally unlikely that some catastrophic event will take out your entire immediate family. That’s a great comfort in many ways, but even the extremely unlikely possibility that it could occur is enough to twist people’s minds into an estate planning pretzel.

Analysis paralysis, the inability to move forward with a decision because of overthinking the issue, can set in. When faced with that difficult scenario, it can feel equally impossible to pick a charity or next-tier contingent beneficiary.

So, how do you proceed? Consider your options thoughtfully, but also as quickly as possible. Agonizing over what would happen if everyone you love passes away simultaneously isn’t helpful to your state of mind or your estate. Choose a contingency plan you’re comfortable with and move forward.

3.     ‘Do and Then Die’ Thinking

It’s a common, but faulty, fear that the grim reaper will come for you the moment you sign the dotted line on your estate planning documents. Facing mortality head-on can make you forget all logic in favor of the what-ifs.

One trick that can help you get past this kind of thinking is to remind yourself that you can change your plan whenever you like. Though the document should accurately reflect your current wishes, thinking of your estate plan as a first draft can help you overcome the illogical reasoning that a completed will means you’ll be meeting your demise soon.

Financial Goal-Setting Tips to Help Achieve Your Money Goals

1.     Decisions = Family Discontent

Money can be a divisive topic in some families, which is why a common estate planning fear is stirring up conflict in your family. Though making estate planning choices can seem difficult, having any plan in place – even a flawed or clandestine one – is better than not having any plan at all.

It’s easy to become overwhelmed by the thought of causing family trouble, but try to think past it. If tragedy strikes, it would be even more challenging for your family if there’s no estate plan to guide the ones you leave behind.

2.     Too Complicated, Too Costly

Doing anything that requires an attorney is enough to spook people, especially when it comes to estate planning. Many people fear the complications or the cost. On average, professionally done estate plans cost around $2,500, which can be a hefty sum to swallow. But consider this: if your home is valued at $500,000 and you have no estate plan to protect it, it will cost roughly $40,000 when it goes through probate.

If your financial situation is holding you back, it can be difficult to prioritize something that feels far off. However, it’s worth saving up now for a professionally prepared will or living trust to protect your assets and your loved ones in the future.

3.     Limited Time Only?

There’s a common misconception that an estate plan is somehow structured like a warranty—that it will run out after a period of time. However, there’s good news if this is what’s been holding you back—these documents are valid until revoked or amended. There’s no need to fear that your plans will expire or that your hard work will go to waste.

Estate Planning: There’s No Time Like the Present

If you think you would benefit from expert help to dispel your estate planning fears and get your assets in order for your heirs, contact Lane Hipple Wealth Management Group at our Moorestown, NJ office by calling 856-638-1855, emailing info@lanehipple.com, or to schedule a complimentary discovery call, use this link to find a convenient time.

Illuminated Advisors is the original creator of the content shared herein. We have been granted a license in perpetuity to publish this article on our website’s blog and share its contents on social media platforms. We have no right to distribute the articles, or any other content provided to our Firm, by Illuminated Advisors in a printed or otherwise non-digital format. We are not permitted to use the content provided to us or my firm by Illuminated Advisors in videos, audio publications, or in books of any kind.