Hope for your financial life and beyond

8 Questions to Ask When Setting Up A Family Inheritance

family inheritanceIt’s hard enough to deal with the topic of our own death let alone what will happen to our possessions once we pass away. Setting up a family inheritance can get complex and technical.

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?

For most basic estates a person can get by using some basic will software. Quicken WillMaker Plus and Legal Zoom are two good resources to consider.

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.

Conclusion

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?

Image at FreeDigitalPhotos.net

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.”

Next Post: An Amazing Offer From the Coolest Inheritance Story in the Bible

Prior Post: Should I Leave An Inheritance to My Children?

I hope you enjoyed that post. Want more?
Sign up to receive my blog posts via email and get your free gift...
99 Ways to Spend Less and Save More

Privacy Guarantee: I will not share your email with anyone.

Comments

  1. Keep in mind here that assets with their own internal beneficiary designation (like a bank account, IRA, mutual fund account, etc.) do not pass through a will or a trust so long as you have a beneficiary designated. They pass automatically on their own. Of course, you can leave them to your trust if you wish, and then they will be administered according to the terms of the trust. But if all you want to do is leave them to a relative, simply designate the relative as the beneficiary or co-owner of the account, and forget about it.

  2. I agree that you make instructions as clear as possible on your will. You don’t want conflict to arise because your instructions for the division of your estates is unclear. Like you said, it’s important to include as much detail as needed in your will, even if it seems like something insignificant. Thanks for the article.

  3. I agree consulting an attorney is a wise thing to do. You want to be sure that your inheritance and estate is in professional hands. My mother might not be able to handle all of this on her own, it seems like a lot to deal with.

  4. This is a very informative .The most loving thing my mother ever did for me was make sure I had all documents necessary before I actually needed them. Occasionally, she would hand me something and say, ‘Here, put this with the rest.’ When the time came, I had everything I could have ever needed, the name and phone number of her chosen attorney, will, passwords, account numbers, original insurance policies, powers of attorney, etc. She logically realized there was no reason to keep the originals herself because an emergency could come at any time and I’d need those documents ASAP. That ‘survival packet’ helped me when I needed it most and I’m grateful she loved me enough to help me through the hardest days I’ve ever known.

    • “…make sure I had all documents necessary before I actually needed them.” I couldn’t agree more Richard. I can’t emphasize this enough…the more you do for those who will be left behind is the greatest gift you could give them. Be organized and get things in order before it’s too late. Your loved ones will appreciate you for it.
      Brian recently posted…The Best Definition of Teamwork You’ll Ever ReadMy Profile

  5. This was a very informative post. I have been looking more into this ever since my grandma’s passing.
    Michelle recently posted…Why I Stopped Checking My Stats and Started Loving My Writing InsteadMy Profile

  6. Leaving a lasting legacy for your kids and heirs is so important. Too many young families/couples don’t think much about this and then when they die their family is up the creek because of poor family planning.

    One tip is to review your wills, family plan, trusts, etc on a yearly basis. Make sure it’s all good to go. That few minutes spent reviewing your legacy items will save so much headache down the road.

    Great post.
    Allen recently posted…The iPhone 6 & Apple Watch: Do You Really Need it?My Profile

    • I think there is great value in reviewing your will on a yearly basis or whenever a major change occurs. That’s a good reminder as I haven’t done that yet this year. 🙂

  7. Wow, really important questions to consider! At least in Asian families, it seems there is always an inheritance issue that divides the family. Dispersing wealth can be a real blessing to those who receive it, but the love of receiving it can also become the root of a lot of evil.
    Deb recently posted…A Random Crumb #1: Soapy SavingsMy Profile

  8. Good points here, Brian. It’s so important to think about these things well in advance. I’ll echo your mention of consulting a professional if you have a disabled family member. One of my nieces has down syndrome and my parents set up a separate trust for her, which needed to be executed differently from the trusts for their other grandkids. I’m glad they found a lawyer who focuses on special needs trusts and could set something up that will work best for my niece.
    Mrs. Frugalwoods recently posted…Great Trash Finds: The Sister EditionMy Profile

  9. I intend to solve the inheritance problem by spending every dime I have before I de. So far I’m doing an excellent job of it. Maybe someday soon I will actually have some savings.
    Brad recently posted…Saving Money by Being Held AccountableMy Profile

  10. “the wrong answer is to ignore the wealth transfer process.” Amen. And sadly, it’s the answer too many people choose because it’s so too complicated or they don’t want to make hard choices now. I have seen even close knit families fall apart and start fighting over things like a dining room table. I think it’s important for you to decide who and when you wish to bequeath your assets and materials goods to. I also think you need to be very clear and upfront with your family regarding your decisions. Kids shouldn’t assume they will inherit everything but it’s also not really fair to lead them to believe they will if that is not your intention. You have to stay firm, which I imagine is why parents choose not to tell their kids so they are not influenced by their pleas. You may not be around to have to deal with ill feelings and discontent, but it can create huge rifts in families, and I want my legacy to enrich, not tear apart. There are lots of considerations as you pointed out and people need to go slow and figure out what makes sense for them and their family.
    Shannon recently posted…Who Needs Life Insurance? Find Out If You Do.My Profile

    • The funny thing is…the wealth transfer is not that complicated…I think it’s just perceived that way. Realistically a family could put something together in an afternoon using the Quicken WillMaker software. That’s what we started with and it wasn’t hard at all. Maybe it comes down to just plain laziness and not wanting to face the inevitable.
      Brian recently posted…Should I Leave An Inheritance To My Children?My Profile

  11. In my experience, people want to avoid the gift tax, so they wait until death to payout the inheritance. The problem is that they’re unaware of any problems with how they’ve set up the inheritance until it’s too late. I think having an excellent attorney and accountant are key here.
    Natalie recently posted…We’re Giving Away 20 Personal Finance eBooksMy Profile

Speak Your Mind

*

CommentLuv badge