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Will You Get An Inheritance Or Will Your Parents Blow Through It?

It’s probably not the best idea to plan your future around a windfall.

Our collective imagination embraces the fantasy of a large inheritance. How might our lives change if a massive influx of cash was in the cards?

Deeply ingrained in our society you’ll find inheritance as a familiar plotline of popular novels, films, and television dramas, as well as the story behind many of the most powerful families in American history. Unfortunately, the truth is most people don’t share the same lineage as the Rockefellers or Astors.

So, why is it that so many people are expecting, and even counting on, an inheritance? Is this wishful thinking or is it soundly based on estate planning? It seems that the data isn’t adding up. According to a Natixis U.S. Investor Survey as cited by CNBC.com, almost 70 percent of young people expect to get an inheritance, but only 40 percent of parents plan to leave one. Even more distressing, the article points out that 44 percent of Boomers don’t have a Will, and over half don’t expect to have money left to pass on to their heirs. Inc.com citing a Merrill Edge study explains why this is concerning: One-third of Americans would need an inheritance to achieve financial stability.

It seems people increasingly expect and feel they need an inheritance, while the data shows it may not be there. Of those who will receive an inheritance, their payout may be smaller than they think. Annuity.org reporting on results from a Survey of Consumer Finances noted the average inheritance in the United States was $46,200, which is a lot smaller than the average expected inheritance in the United States ($72,200). 

Real Considerations For Inheritances

Not every family openly communicates about money, and it’s easy to assume wealth is present when it may not be. Factors like increased lifespan easily add up to increased spending.

Even with Medicare and Social Security, seniors are spending more on health care and health insurance during retirement than they did while working. Most retirees are living on a smaller fixed income yet still have to grapple with housing, food, apparel, and entertainment costs all while navigating rising costs of inflation. 

Steps To Consider If You Want To Leave An Inheritance

If you’re in or nearing retirement and have assets and cash, here are a few tips to consider to ensure your loved ones are among the lucky who get an inheritance.

Create a Will

If you haven’t done this yet, make it a priority. Not having a Will means your assets will be distributed by the court according to your state’s succession laws after a lengthy probate process. In short, dying without a Will (fancy name: intestate) can be arduous and costly for your loved ones.

Creating a Will and overall estate plan makes inheritance much quicker and simpler. You’ll get to decide who receives your assets and how they should be distributed.

Something to keep in mind: All taxes and debts must be paid from your estate before heirs get their cut. Having more debts than assets could eliminate any inheritance you wish to leave.

Create a Trust

If you want more protection and control over the assets you leave behind set up a Trust, which can help reduce estate tax (if you have a lot of money to leave behind), help avoid probate, and allow a much easier transfer of your assets to your heirs.

Trusts are managed and held by a third party, which means your assets in the Trust will be distributed according to the directions you create for the Trust. Assets can include real estate, investment and financial accounts, as well as any other valuable interests or property you have. You need to determine which type of Trust makes the most sense for your needs.

Trusts can be either Living or Testamentary.

  • Testamentary Trusts go into effect after your death and are often created within your Will. This means your assets need to pass through probate and whatever’s left over is distributed according to the rules of the Trust and don’t need to be spelled out in your Will. 
  • Living Trusts become effective immediately and upon death any assets in the Trust are distributed according to the rules of the Trust (again, no need to include directions in your Will). 

A common type of Living Trust is a Revocable Trust, which allows you to maintain control over assets and make changes to the terms or beneficiaries as often as you like while you’re alive. On the flip side, Irrevocable Trusts are quite the opposite and the assets you place in these are no longer yours.

Set up an Irrevocable Trust

This type requires you to give up all ownership rights of the assets you place into the Trust. You also won’t be able to change the terms and conditions once the Trust is in place.

Here are some reasons this type of Trust makes sense. Assets placed in an Irrevocable Trust aren’t technically yours so they don’t count as part of your estate. This means creditors can’t collect against it and your loved ones will be spared paying any applicable estate taxes.

An Irrevocable Trust can also help you qualify for Medicaid, especially regarding long-term care benefits. Since the assets you place in an Irrevocable Trust are no longer yours, they won’t count toward your overall net worth. A lower net worth means you might get access to those Medicaid benefits while still leaving something for your heirs.

Give Gifts

While this isn’t exactly an inheritance, it’s nice to consider presenting loved ones with gifts while you’re still alive. Every year it’s possible to give each loved one an untaxed gift; for 2022 that amount is $16,000. Another possibility is to give a savings bond, which can be purchased either as a joint account or issued in the name of the other person.

Hire A Professional To Get The Complicated Stuff Done Right

If you choose to create a Trust or give gifts, it’s best to speak with an estate attorney or financial advisor to be sure they're done right. These things can get extremely complicated. If done incorrectly it could result in confusion or possible penalties among the heirs you’re trying to help.

Written by Ingrid Alt

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