This information is derived from Rehmann’s Private Client Advisory (PCA) experience, a uniquely tax aware approach to growing and protecting wealth through a team of specialists curated for each PCA client’s needs.
Two of the biggest reasons our clients tell us they’re hesitant to discuss their estate plan with their children: One, they’re uncomfortable talking about death or dying. Two, clients worry that if the kids know what they stand to inherit one day, they’ll be more likely to rely on that inheritance rather than working to build their own wealth.
While talking about death, dying, and inheritances can be uncomfortable at first, time and again, we find that the discomfort stems mainly from the client’s concerns about the welfare of those they leave behind.
Mapping out a plan to provide for and protect the people and causes you love diminishes that discomfort; it brings a sense of meaning and purpose.
Sharing appropriate details about your wealth plan goes even further. It assures your peace of mind because it helps your recipients understand their role and responsibility to protect your legacy — and helps them live the life you’ve imagined for them.
Let’s Talk to Beneficiaries
The maturity of your kids and other beneficiaries will play an important role in the information you share. You know your children best, but here are some considerations and benefits to getting them involved early on:
Kids and Teens
Educating adolescents on the basics of how the financial world works — think wants vs. needs, cash vs. credit, accumulating interest, philanthropic giving, etc. — can lay a strong foundation for their financial literacy. One-on-one conversations allow you to give your full attention and tailor the talk to each child’s level of understanding and interest. Talking about money isn’t only educational; it helps them think about their future goals, a powerful first step in their ability to make responsible decisions with wealth when they have access to it.
Young Adults
You can decide whether it’s best to include dollar amounts in these conversations, but keep in mind that doing so can help them plan more realistically — and give you opportunity to share your valuable insight. Talk about their current obligations, priorities, and the big life changes on their horizon. Will they purchase a home? Get married? Have children? Paying down debt like college loans and credit cards are attractive options for a windfall. Still, there may be better strategies to meet their long-term goals, such as purchasing life insurance or setting up 529 plans to fund educational expenses for their children.
Mature Adults
The young adult questions remain true, with an added layer of retirement lifestyle and healthcare considerations. Strategies to maximize the benefits of receiving wealth at this stage in life could be as simple as establishing or funding an existing ROTH IRA for tax-free income in retirement — or as in-depth as purchasing long-term-care insurance. Another idea to consider when you have mature beneficiaries: Would it be beneficial to gift assets to them during your lifetime?
Tax Considerations
Understanding tax implications of transferred wealth is important for you and your beneficiaries. For example, if the asset is from a decedent’s estate (the estate of a person who has passed), beneficiaries may not have immediate tax liabilities because simply receiving assets is not necessarily a taxable event. How those assets are handled, used, invested, or disposed of, however, can have significant tax implications.
Gifted Assets vs Inherited Assets
Consider this example: You purchased a vacation house decades ago for $150,000. It’s valued at $1 million today. If you gift the house to your children before you die, the cost basis is the original $150,000 value — so if they sell the home at the current value of $1 million (or more), they’d face significant capital gains tax consequences. On the other hand, if the kids inherit the home as part of your estate after you pass, their basis for tax purposes is stepped-up (i.e., the value upon the death of the owner) to $1 million, which could mean significantly lower capital gains tax when the home is sold.
Inherited IRAs and HSAs
Generally, inherited IRA non-spouse beneficiaries have 10 years to withdraw account funds and must pay taxes on annual RMDs (required minimum distributions). A spouse who inherits an IRA can choose annual RMDs or a direct rollover into his or her own IRA. In either scenario, your beneficiary’s current and projected tax status are important strategic considerations to limit tax liabilities and maximize withdrawal amounts. Inherited HSAs (health saving accounts) also require careful planning. Non-spouse beneficiaries receive an immediate cash payout that is fully taxable; however, they have one year to use the funds to pay the decedent’s HSA-covered medical expenses, lowering the balance and tax liability.
We can help you decide the best way to share your wealth plan and guide the conversation to ensure your wishes are fulfilled, your legacy is protected, and potential tax implications are minimized. At Rehmann, we surround our clients with a network of trusted advisors who take the time to understand the nuances of your estate. Learn more here: https://www.rehmann.com/solutions/estate-and-legacy-planning/
Contact Kim Trujillo at [email protected] or 407.434.9969 or Dave Cook at [email protected] or 616.975.2842 for personalized assistance and advice.
Securities offered through Rehmann Financial Network, LLC, member FINRA/SIPC. Investment advisory services offered through Rehmann Wealth, a Registered Investment Advisor.
