According to an Ohio University study, you will inherit money or assets in your lifetime. That’s the good news. The bad news is, if you’re like most people, you’ll only hang on to about half of it.
“People need to plan for inheriting wealth to avoid the pitfalls that result in so many heirs making emotional or ill-informed decisions they later regret,” says Michael Abbott, a veteran financial consultant and CFO of The Abbott Bennett Group.
“Particularly with the death of a parent, people can feel a whole range of emotions – guilt, overwhelming loss, anger, relief,” says Chris Bennett, co-founding partner of the firm. “It’s a very bad time to make decisions that can affect you and your family for the rest of your lives.”
Abbott and Bennett share four tips for planning for an inheritance.
• If you inherit non-cash assets, ask questions before you liquefy.
People inherit all sorts of assets: real estate, stocks and bonds, IRAS, gold, jewelry, etc. Different types of assets have different tax burdens attached. In order to preserve as much of your inheritance as possible, you need to learn the best way to minimize the tax burden for each asset.
“Once you’ve liquefied the asset – once you’ve turned it into cash – it’s too late,” Abbott says. “Life insurance is an exception. You won’t be taxed on that. A ROTH IRA that’s more than 5 years old will also be an exception if the amount is exempt under the current federal estate tax rules” ($5.3 million for 2014.)
• If you inherit a tax-deferred retirement plan, consider rolling it into an inherited IRA.
“An IRA or 401(k), for instance, is a tax-deferred asset – the person who left it to you did not pay taxes on it. So if you take it in a lump sum, which some plans require, everything you withdraw will be considered taxable income for you,” Bennett says.
Alternatives include rolling the money into an inherited IRA – one that retains the deceased’s name along with language that clearly indicates it’s inherited. Don’t mix it with your own IRA. Then you can take small distributions over the course of years, and the money will continue to grow.
• The best planning starts with a conversation with your loved ones now.
One of the biggest mistakes people make is not discussing inheritance matters while everyone is still alive and well. It allows the heirs to know their loved ones’ wishes and to make plans – without emotion – for what they may do with the assets.
“Some adult children won’t initiate the conversation because they’re afraid of appearing greedy or eager for their parents to die,” Abbott says. “Sometimes, the parents want to discuss matters but their children aren’t comfortable addressing mom and dad’s mortality. Even spouses avoid talking about it. It’s the most easily avoidable mistake families make.”
If you want to initiate the conversation, look for opportunities, such as when a family you know or a family in the news is dealing with estate issues.