4 things to consider when leaving an inheritance
Transferring wealth requires some forethought. There are a number of factors you'll need to consider about your own financial situation. You'll also want to think carefully about your intended recipients and what's most beneficial — as well as financially feasible — for them. By taking the time to think ahead when it comes to leaving an inheritance, you can avoid adding a headache to your loved one's heartache after you pass.
Help yourself before helping others
Before you get swept up in what you're leaving behind, it's critical to make sure you're adequately covering your needs while you're still here. Take a moment to consider your personal financial situation and determine how you can adequately fund your remaining years.
When calculating how much money you might need, "take into account the impact of inflation and taxes," as well as the possibilities of "unexpected illness and high health care costs," Investopedia said. Also take into consideration the fact that more and more people are living longer, which makes it "essential to manage retirement-plan withdrawals to avoid depleting assets during your lifetime," added Investopedia.
Cash trumps sentimentality
If you're thinking about leaving your house to your children, you might want to think again. While over three-quarters of parents plan on leaving a home to their children, roughly 70% of those children inheriting a home plan on turning around and selling it, The Wall Street Journal reported, based on a Charles Schwab survey.
Why? "Deciding what to do with a family property is often both an emotional and financial decision, but the rising costs of renovations, property taxes and utilities are making it harder for adult children to hold on to the real estate," the Journal explained.
So in lieu of placing that burden on your heirs, you instead might consider taking on the work of selling, and opt to leave them something with far fewer complications: cash. "Your heirs also know exactly what it's worth, can easily divide it according to the terms in your will, and they don't have to do any hard work to access it, versus something like real estate which can take months to sell.
That said, "vacation homes and secondary properties ... are more likely to be kept by heirs, at least for a few years, especially if it is in an appealing location," the Journal said.
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Consider the tax consequences
Even if you know your child would love to inherit the lake house where they spent summers as a kid, you might not be doing them a favor passing it onto them if it's ultimately out of reach for them financially due to steep property taxes. In fact, "taxes remain a key reason many heirs sell relatively soon," the Journal said, not to mention homeowners association fees and the cost of upkeep and repairs.
The added burden of taxes doesn't just apply to passing on property either. For example, if you plan to leave behind your 401(k) plan or IRA, your heirs will need to pay taxes when they take out that money.
There are steps you can take to minimize your heirs' tax burden later, even if that means assuming more of the tax burden yourself now. To get ahead of taxes cutting into what you leave behind, T.Rowe Price recommended "using a tax professional or financial planner and starting the planning process at least 10 years before you're subject to RMDs."
Clear and direct communication is key
Just because you've got your plans all mapped out in your own head doesn't mean everything will go smoothly when you're gone. To make sure your vision becomes a reality, and to minimize any feelings of anger or resentment down the road, AARP underscored the importance of "open communication."
For instance, consider giving your kids a ballpark idea of how much they might inherit, instead of leaving them to wonder. And while the easiest way to avoid squabbles down the road is to keep things equal, if that isn't what you're doing, it's helpful to provide an explanation. "At the very least, write a note to go with the will," advised Leanna Hamill, a Boston-area estate planning attorney, in an interview with AARP.
Lastly, things can go more smoothly if you take charge of distributing your inheritance rather than, say, tasking your eldest child with doing the work of division. "If you want all siblings to inherit equally, put them all down as beneficiaries," Hamill told AARP.
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week.
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