There’s an exciting event that happens in the spring each year. The young ones gather their baskets and run out into the yard or pasture to hunt for treats concealed in plastic eggs left by a giant bunny. Easter egg hunts are great fun for kids, the thrill of the hunt and the sweet reward of the catch. Hunting for treats as a child is great fun; I’ll tell you what’s not, hunting down assets and inheritance as an adult.
As a family financial planner, I’ve worked with many families, advising one generation after the next, the whole family tree. My job/goal is to help families build generational wealth and have everything aligned for when someone passes or a transitional life event happens – legacy planning. Going on an easter egg hunt to locate and comprehend the departed’s intentions is somewhat of a nightmare. I hope to intervene and associate myself with the entire family before these events happen so that the transition goes as smoothly and fortuitously as possible.
Inheritance Strategy – What to Know Beforehand
- Diversification does not mean hiding your money/leave-on assets scattered everywhere. Some older clients of mine have taken advice from countless people/financial advisors throughout their lives; the result is an easter egg hunt for IRAs,401ks, mutual funds, and savings bonds, not to mention random stocks holding too. It’s quite a rat’s nest to untangle, leaving the family in a stress-filled state. Thankfully, family members can research whether they have unclaimed property from a network of state-run databases; for Massachusetts, it’s https://www.findmassmoney.com/
Successful wealth diversification does not mean having a bunch of different easter baskets with the same egg in each. No, it’s about having one basket (resource) with multiple different types of eggs in it.
*There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
- Consolidation and guidance are needed to help ensure that money isn’t unnecessarily lost in the shuffle or taxed. Depending on the family’s current status, inheritances must be directed to the appropriate beneficiary or risk incurring losses.
For example, I had a client (doctor) who wasn’t privy to her parent’s plans for how they would be gifting their leave-on assets. Her parents wanted to give her and her brother substantial inheritance, but the siblings had two very different financial positions. The son was a school teacher, and the daughter (my client) a doctor, each in completely different income tax brackets. The parents decided to leave a house to their son and an IRA to their daughter. Because of this, the IRA incurred a significant IRD tax (Income in Respect of Descendents) as the daughter was in a higher tax bracket than the son. And the son received his inheritance tax-free.
If I had been privy to this situation, we could have had a 15-minute conversation and switched the beneficiary roles, saving the family tens if not hundreds of thousands of dollars. Basically, their money was on auto-pilot for 30+ years without ever being guided to reflect the family’s current circumstances.
A quick breakdown:
Son (teacher) – receives $1,000,000 tax-free.
Daughter (doctor) – $1,000,000
– 37% federal
– 5% (could be pushed to 9%) = $580,000
Daughter’s total taxes on inheritance – $420,000
If we switched it around and took the son’s portion over ten years
Son(teacher) – $1,000,000
– 22% federal
– 5% = $730,000
Son’s total taxes on inheritance – $270,000
The daughter (my client) inherits $1,000,000 tax-free, but, to make things even, they may write into the will that they split the house 86% daughter/14% son. One conversation could have disinherited the IRS out of $150,000 in 15 minutes.
*This is a hypothetical example and is not representative of any specific investment. Your results may vary.
*This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
- What the government can and cannot take is a concern that all parties should be familiar with, as it will vary greatly from person-to-person, family to family. As family dynamics change, so do tax laws and individuals’ tax status. Preparing and synchronizing for these changes is a cornerstone of successful family financial planning. There are several taxes the government may or may not be able to impose pending on circumstances, including estate tax, inheritance tax, capital gains tax, income tax, and gift tax.
Families Need Help
A family financial planner like myself is there to help account for all the variables that arise before inheritance occurs. The better the relationship with the advisor, the more likely the transition from parents to children or grandchildren will happen without issue. Having that necessary conversation about live-on vs. leave-on assets is something a planner like myself will help facilitate with compassion, tact, and honesty.
Please reach out if you’d like to begin the conversation/process of consolidating your family’s assets before a transition. I truly appreciate and enjoy learning about an entire family tree and helping ensure all the puzzle pieces fit together.
