Why Everyone Needs an Inheritance Strategy

Q: My partner recently lost her mother. They never talked about money and the family battling that took place while settling her estate was a nightmare!  Do you recommend families talk about these things in-advance to make things easier?

Losing a loved one is often difficult both emotionally and logistically.  While each family is different when it comes to money, I do feel that having an inheritance strategy in place can often make life much easier for all involved down the road.

Of all the financial strategies that many people have in place, an inheritance strategy is usually not one. Discussing estate planning amongst family members can be uncomfortable even with the best relationships, let alone discussing the contents of an estate strategy and what you may be inheriting after your loved one is gone.

But having a plan in place can save you and your family from headaches down the line. This is especially true for partners who are not legally married, and therefore not entitled to the potential inheritance benefits of spouses.

Inheritance With A Will

Having a will in place helps designate beneficiaries, determines who receives what, and also who will serve to carry out the deceased’s wishes. Of course, a will doesn’t prevent anyone from contesting it, but it does tend to make things easier. Knowing if you are the executor, and/or a designated beneficiary — and having an idea of what that inheritance looks like — can certainly help you plan for what happens when you inherit cash or other assets.1

When No Will Exists

Not having a will may make receiving an inheritance painful. Sorting out an estate can result in steep legal fees, dealing with probate, and potentially fighting with family and friends. If you’re not sure exactly what the estate entails, it could take months or years to track everything down. Then there’s the personal cost. Even if everyone agrees on how the estate should be settled, the process often takes a financial, mental, and emotional toll.2

If there are assets other than cash to divide up, sorting through an estate without a will becomes exponentially more complicated. Certain assets with beneficiary designations (life insurance, retirement accounts) will likely pass outside of the will, and real estate and assets other than cash may be subject to different inheritance rules, depending on how they are titled. Spouses often receive additional tax breaks and incentives for an inheritance, and many adult children and other relatives may not have that luxury, depending on the rules of each state.2,3

Creating an inheritance strategy also allows you to help make sure your loved one’s estate is in order. You don’t want to wait until after your loved one is gone to discover, for example, that an ex-spouse/partner, or estranged family member is still listed as a beneficiary on a life insurance policy.

The Pitfalls of Inheritance

While many of us dream of a lump sum of cash falling into our laps, the reality of inheritance can be a little less rosy. Cash typically doesn’t fall under the heading of taxable income, but if you received that income in the form of royalties or the deceased’s company bonus, that might have the IRS view this as a source of income.4 Inheriting real estate means that you now have a property that requires maintenance and upkeep as long as you hold onto it. And while it used to be easy to shelter retirement accounts into a so-called “stretch IRA,” the SECURE Act abolished this option for everyone but a surviving spouse or minor child,5 forcing these accounts to be liquidated typically within a 10-year period for most other beneficiaries.

Don’t Quit Your Day Job

Just because you’ve received a large inheritance doesn’t mean it’s time to quit your day job and retire to luxurious living on a tropical island. According to the National Endowment for Financial Education, an estimated 70% of people who receive a large inheritance spend it all within a few years.2 Having a plan can make it easier to stay on track before the temptation to spend hits your bank account.

Even in the best circumstances, dealing with an inheritance can be complicated. Remember, even if you’re not expecting a large amount of money or property from an estate, it still behooves you to have a strategy in place. It’s important not to make any significant decisions or to suddenly change your spending habits just because more assets are now available to you. Working with a skilled financial advisor and estate planning attorney, knowledgeable about the ins and outs of inheritance, can help make sure your inheritance is working for you, not against you.

Sources:

1https://smartasset.com/investing/how-does-inheritance-work

2https://www.kiplinger.com/article/investing/t064-c000-s002-smart-ways-to-handle-an-inheritance.html

3https://www.hrblock.com/tax-center/income/other-income/is-your-inheritance-considered-taxable-income/

4https://www.marketwatch.com/story/inheritance-estate-planning-and-charitable-giving-4-strategies-to-reduce-taxes-now-11645140214

5https://www.forbes.com/sites/davidrae/2022/02/22/how-to-minimize-taxes-when-you-inherit-an-ira/

Jeremy R. Gussick is a Certified Financial Planner™ professional affiliated with LPL Financial, the nation’s largest independent broker-dealer.*  Jeremy specializes in the financial planning and retirement income needs of the LGBTQ+ community and was recently named a 2021 FIVE STAR Wealth Manager as mentioned in Philadelphia Magazine.** He is active with several LGBTQ+ organizations in the Philadelphia region, including DVLF (Delaware Valley Legacy Fund) and the Independence Business Alliance (IBA), the Philadelphia Region’s LGBT Chamber of Commerce.  OutMoney appears monthly.  If you have a question for Jeremy, you can contact him via email at [email protected]

This content is developed from sources believed to be providing accurate information and provided with the assistance of Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

Jeremy R. Gussick is a Registered Representative with, and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.

*As reported by Financial Planning magazine, June 1996-2021, based on total revenues.

**Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2021 Five Star Wealth Managers.