The aftermath of what we do could lead to a potential mess as this 2012 article from Fox News demonstrates:
“Heirs of a wealthy New York art dealer were left a $65 million sculpture [named “Canyon”]…The bequest comes with a $29 million tax bill, but since the piece includes a stuffed eagle, it can’t be sold…federal law makes it a crime to possess, transport, sell or otherwise convey a bald eagle, whether it is alive or, as in this case, stuffed…placing a value on an item that cannot be sold is no easy feat. The venerable auction house Christie’s placed the value of “Canyon” at zero. The IRS initially put it at $15 million, then jumped the figure to $65 million…”
Most of us will never have to deal with numbers that large. But it’s no wonder we get confused with our heirs, the courts and the IRS to account for. It all seems like a big tangled mess.
So what should we do?
Well, the wrong answer is to ignore the wealth transfer process. With better planning the wealthy art dealer mentioned in the article above could have avoided placing this conflict in the lap of her family. Perhaps asking some relationship and technical questions would have eliminated some confusion and helped the inheritance pass with greater ease.
Family Inheritance Relationship Questions to Ask
To whom should I leave money?
As I’ve stated in my prior post on inheritance and children, we only have three choices when it comes to distributing our assets: our heirs, charities and the government. One or all of them will receive something depending on the amount of wealth you’ve accumulated and how you choose to leave it.
First let’s state the obvious: nobody wants more of their money going to the government when they die. It’s tough enough to stomach paying taxes while we are alive. The thought of the government taking more at death through an estate tax is reprehensible to some. (More on this in a bit.)
People regularly give to charities, their alma mater, or other non-profit ministries (like their church) at death. This is usually a way for people to bless institutions that touched them during their life or to give to causes they were involved in and felt passionately about.
The final option is to transfer wealth to individuals, most normally family members but also perhaps friends. This would be seen as the most common option and the place most people initially start when planning who receives their assets.
How much should I leave to each recipient?
It’s such a loaded and complex question, and a highly personal one. So many variables come into play that a person will spend the vast majority of their time in the estate planning process sorting this question out.
Lets assume the government will be excluded from the equation because our net assets will not meet the taxable threshold upon our death. So we can now focus on heirs and charities only. Some angles and questions to pursue that may help answer this question include:
– What do I value? (or what’s important to me?)
– Who needs the money?
– Who would be the best steward of the money?
– Where could the effective use of the money touch the most lives?
– What’s the emotional health (maturity) of my family members?
– Am I still responsible to provide for anyone? (young children or spouse)
– What causes have touched my life?
It’s a complete personal choice how you dole out the family inheritance. You may feel the breakdown should be 90% family and 10% to charities. Some divide it 50-50. Others give it almost all to charity. Some have even left millions to their pets.
How will this money impact the recipients?
This is a crucial component to consider. Will the assets given at one’s death change somebody’s life or fortunes? This could be for better or worse depending on the financial maturity of the one receiving family inheritance.
For instance, take this fictitious (but real to life) example:
Kate and Alan have been struggling with money since their marriage started. Each was a single child who grew up in an environment where their parents gave them whatever they wished. They don’t plan out their monthly expenses in a budget and therefore spend more than they make each month. “The future will take care of itself” they say. So they live in the moment, buying whatever they wish and enjoying whatever pleasures they can find.
How will a sudden windfall of money affect this couple? It’s doubtful an influx of money is going to change their behavior. It will only enhance the poor views of and habits related to money management that are already present.
Should I tell my family what to expect?
I can see why you may want to keep this a secret but do you really want them to be surprised? I would encourage you to communicate with the family ahead of time about your estate plans. In fact, I’d suggest this be an ongoing conversation that extends over years as you plan for the transfer of your wealth.
Having the inheritance talk should get many questions answered and allow a sense of peace to be present for the entire family. Death is emotional enough. There doesn’t need to be shock and conflict surrounding your last wishes.
Family Inheritance Technical Questions to Ask
Do I need professional advice or counsel?
If there is complexity however, it would be advisable to consult an attorney, a financial adviser and even accountant. According to wills and estate planning expert Julie Garber having these professionals look over or develop and estate plan would be advisable if you:
Are in a second (or later) marriage
Own one or more businesses
Own real estate in more than one state
Have a disabled family member
Have minor children
Have problem children
Don’t have any children
Want to leave some or all of your estate to charity
Have substantial assets in 401(k)s and/or IRAs
Were recently divorced
Recently lost a spouse or other family member
Have a taxable estate for federal and/or state estate tax purposes
The more complex the estate the more advisable it would be to consult a professional. It would be worth the money to pay their fees to do so.
Are the instructions clear?
Above all you want to avoid conflicts with the family inheritance. This can best be done through the use of a will. To die without a will takes all the control out of your hands and places it into the court system. This is surely bound to lead to family tension over who receives what.
Put as much detail into the will as is needed, even if it means listing who gets your collection of baseball cards. There should be as little ambiguity as possible for the executor who will be administering the estate.
You may also consider leaving a letter if there are some personal things to detail outside of the will. This may include a commentary about why you’ve chosen to divide the assets this way, some final thoughts to your children or a list of things around the house you want to make sure are found.
Will I be paying an inheritance (estate) tax?
You have a right to transfer property at your death. The amount of that property is subject to tax. Most simple estates will not require the filing of an estate tax return.
According to the IRS for the year 2014, a filing is required for estates that have gross assets that exceed $5,340,000. As mentioned earlier, consulting a few professionals would be advisable if this is the case.
When should I pay out the inheritance?
This seems like an obvious answer – at death. I’ll need all my money until then. When else would I pay out a family inheritance?
How about before you die.
As I just pointed out, the government will tax individuals whose estate assets exceed the $5.34 million threshold. This tax may be unavoidable for some…for others it may fall very close. To help avoid this tax individuals can choose to give away some of their money during their lifetime, thus reducing the amount of their total assets at death.
For the tax year 2014, a person can give up to $14,000 to as many individuals as they want without triggering a gift tax. This amount changes each year based on inflation. Gifts in this amount can also be given to charitable organizations, spouses, political organizations, and for medical and some educational expenses.
This has the added benefit of seeing people you love and organizations you cherish be blessed by and use our money before you die. If they don’t manage it wisely, it may make you reconsider leaving them large portions in the final will and testament.
It’s ultimately up to you how and to whom the wealth is transferred. If you need help don’t be afraid to ask or pay for it. Bringing in the right type of advisers could prevent you from making some big financial mistakes.
Setting up a family inheritance requires a great deal of wisdom and preparation. It is necessary though no matter how much wealth you plan to transfer to the next generation. Your family will be hurting emotionally at your death. The last thing they need to worry about is what to do with your assets.
Questions: What other questions should be asked in the estate planning process? Have you seen a family fight over a family inheritance? Have you had the “inheritance talk” with either your adult parents or your children?
Disclosure of Material Connection: Some of the links in the post above are “affiliate links.” This means if you click on the link and purchase the item, I will receive an affiliate commission. Regardless, I only recommend products or services I use personally or believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”
Prior Post: Should I Leave An Inheritance to My Children?