Why Everyone Needs an Inheritance Strategy

Of the various financial strategies many people have in place, an inheritance strategy is usually not one of them. Discussing estate planning among family members can be uncomfortable even with the best relationships, let alone discussing the contents of an estate and what you may be inheriting after your loved one is gone. 

That said, having a plan in place can save big bucks, time and headaches in the future. Losing a loved one is difficult emotionally but having an inheritance strategy in place can make your life, and the lives of your heirs, easier when the time comes to settle an estate. 

Inheritance With a Will 

A Will often designates guardians and defines beneficiaries of your assets. From pets and children to cars and collectibles, a Will details which of your friends and family will receive your things. Generally, a Will provides instructions to the probate court. As such, if your inheritance strategy involves only a Will, it is likely your assets will transfer through probate, which can be a lengthy, stressful process. Of course, having a Will does not prevent anyone from contesting it, but it does tend to make the transition of things to beneficiaries easier. Knowing if you are one of the designated beneficiaries—and having an idea of what the inheritance looks like—can help you plan for what happens when you inherit assets.1 

Inheritance With a Revocable Living Trust 

When thinking about inheritance, we often recommend going a step further than a Will. We often work with our clients and their estate planning attorneys to adopt Revocable Living Trusts. This written document, like a Will, determines how your assets will be handled after your death. However, when you pass, your Trust does not. Thus, if your Trust is the owner of your assets and you have appointed a Successor Trustee for your Trust, the probate court isn’t needed to oversee the transition of your assets to your beneficiaries. In addition, a Trust can often allow for more detailed instructions about who gets what, when and how they get it.   

Generally, when a trust is established, it is a ‘revocable living trust’ and you, the grantor, can make changes as needed if you are alive. The day the owner, or grantor dies, the Trust becomes ‘irrevocable’, and no additional changes can be made. This ensures your wishes are fulfilled in accordance with the latest revision of the Trust.   

Perhaps the biggest benefit of incorporating a Trust to hold your assets is the ability to avoid probate. With a property funded Trust, your heirs can skip the headaches, time, expense and emotional toll of the probate process. After all, losing a loved one is difficult enough on it’s own. 

When No Will or Trust Exists 

If you haven’t adopted a Will or Trust, the Government will provide an inheritance plan for you.  Not having a will or trust can make receiving an inheritance more complex as the process will follow the "rules of intestacy" for each state in which you own property.  Sorting out an estate without direction can result in additional legal fees, complexities with probate, and potential conflict with family and friends. If you’re not sure exactly what is in an estate, it could take months or years to track everything down. Then there’s the personal cost. Even if everyone agrees on how the estate should be settled, the process often takes a financial, mental, and emotional toll.2 

If there are assets other than cash to divide, sorting through an estate without a Trust or Will becomes exponentially more complicated. Life insurance, real estate, and assets other than cash may be subject to different inheritance rules. Spouses often receive additional tax breaks and incentives for an inheritance, but many adult children and other relatives don’t have the same luxury.2,3 

Creating an inheritance strategy allows you to help ensure you or your loved one’s estate is in order. You don’t want to wait until after your loved one is gone to discover, for example, an ex-spouse is still listed as a beneficiary on a life insurance policy. 

The Pitfalls of Inheritance 

While many of us dream of a lump sum of cash falling into our laps, the reality of inheritance can be a little less rosy. Cash typically doesn’t fall under the heading of taxable income, but if you received the income in the form of royalties or the deceased’s company bonus, that might cause the IRS to view this as a source of income.4 Inheriting real estate means you now have a property that requires maintenance and upkeep as long as you hold onto it. And while it used to be easy to shelter stocks and mutual funds into a so-called “stretch IRA,” the SECURE Act abolished this option for everyone but a surviving spouse or minor child.5 

Don’t Quit Your Day Job 

Just because you’ve received a large inheritance doesn’t mean it’s time to quit your day job and retire to luxurious living on a tropical island. Like many lottery winners, according to the National Endowment for Financial Education, an estimated 70% of people who receive a large inheritance spend it all within a few years.2 Having a plan and trusted team to work with can greatly increase the probability of inherited assets providing a lifelong financial benefit rather than just a big flash.

Even in the best circumstances, dealing with an inheritance can be complicated. Remember, even if you’re not expecting to inherit or pass along a large amount of money or property from an estate, it still behooves you to have a strategy in place. It’s important not to make any significant decisions or to suddenly change your spending habits just because more assets are now available to you. Working with a skilled financial advisor knowledgeable about the ins and outs of inheritance can help make sure your inheritance is working for you, not against you. 

1. https://smartasset.com/investing/how-does-inheritance-work 
2. https://www.kiplinger.com/article/investing/t064-c000-s002-smart-ways-to-handle-an-inheritance.html 
3. https://www.hrblock.com/tax-center/income/other-income/is-your-inheritance-considered-taxable-income/ 
4. https://www.marketwatch.com/story/inheritance-estate-planning-and-charitable-giving-4-strategies-to-reduce-taxes-now-11645140214 
5. https://www.forbes.com/sites/davidrae/2022/02/22/how-to-minimize-taxes-when-you-inherit-an-ira/ 

This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.