Considerations for Passing an Inheritance to Your Children

Annrose Isaac CPA, CFP®, MBA
Annrose Isaac CPA, CFP®, MBA
estate planning

For many people, building wealth means the opportunity to leave an inheritance to their heirs. If you’d like to leave something behind for your children or grandchildren, it’s important to understand that it will impact much of your financial planning. For example, you’ll likely need to increase your savings and explore which tax-advantaged retirement plans are right for your unique situation, as well as thoughtfully consider your future health care needs.

In order to ensure your desire to leave some of your wealth to your children matches your financial capabilities, we’ll review eight essential personal finance considerations.

8 Things to Consider Before Passing an Inheritance to Your Children

1.    Evaluate Your Income Needs

When you’re giving to others, especially those you love, it’s easy to think with your heart instead of your head. That’s why some retirees find themselves giving away their retirement savings without first considering their own income needs. Save yourself from this fate by first assessing how much you’ll need to spend on yourself. You can use this retirement calculator from AARP to help you determine how much you need to save and how much you can withdraw annually once you retire. Remember to take into account inflation and taxes, too.

2.    Plan Ahead for Increased Healthcare Costs

One of the biggest threats to your retirement assets is an unexpected illness that leads to high healthcare costs. When it comes to paying for nursing homes or other types of long-term care, Medicare covers a limited amount and Medicaid requires that you spend nearly all of your own nest egg before it covers long-term care costs.

Know, too, that you cannot simply transfer assets to family members in order to qualify for Medicaid assistance. The program actually restricts benefits if they find that asset transfers were made within a few years prior to a nursing homestay.

Some retirees plan ahead by protecting their assets with a long-term care insurance policy. The policies can be expensive – and they do have limitations – but they may help protect your assets from a catastrophic illness.

3.    Running Out of Money

Have you thought about the possibility that you might outlive your nest egg? As life expectancies rise, it’s important to have a plan for managing your retirement account withdrawals so that you won’t deplete your assets in your lifetime. If you do run out of money, you risk not being able to pay your bills – and you certainly wouldn’t have assets leftover to pass to your heirs.

It is important to work with your advisor to build out your financial plan to model how long your retirement savings will last given your spending/savings habits as well as reasonable expectations for future inflation and return rates on your investment portfolio.  Your financial advisor can help you assess what changes you may need to make in order to reduce the risk that you could run out of money in the future.  Some strategies could include downsizing, working a few years longer than you had initially planned to, etc.

4.    Examine the Tax Implications

When you’re planning to leave assets to your heirs, consider how they could be eligible for favorable tax treatment. For example, inherited stocks and mutual funds receive a favorable tax treatment called a step-up in basis.

If you plan to leave an IRA to your heirs, be aware that they will have to abide by strict rules with regard to taking distributions. Current law states that non-spousal beneficiaries must take full distribution of the entire amount in the IRA within ten years of the IRA owner’s death. (There are exceptions for minor children, disabled individuals, and those who are not more than ten years younger than the IRA owner.)

5.    Utilize a Trust

At times, it makes sense to set up a trust to control distributions from your estate to your heirs. For example, if you or your spouse have children from previous relationships, you may want to use a trust to ensure that specific assets are passed to designated children.

6.    Invest Wisely

If you have a large estate, you may expect that your children will inherit from you and then pass some of those inherited assets on to your grandchildren, too. In this case, you’ll want to ensure your investment portfolio is designed to last for multiple generations. It should grow, preserve capital, and generate income through smart investments.

SEE ALSO: Multi-Generational Planning: Funding a 529 Plan for Your Grandchildren

7.    Decide How You’ll Leave Your Legacy

As you consider your options for passing assets to your heirs, know that there are multiple methods you can use to do so. Here are two of the most common options:

Gift Assets

Gifting allows your loved ones to use your money while you’re still living. Those that qualify for an annual exclusion from the gift tax are completely tax-free and don’t require filing a gift tax return either. A separate annual exclusion will apply for each person to whom you make a gift. For the tax year 2021, the annual exclusion is $15,000.

If you choose to make a bequest to a charity that is meaningful to you, it may not be subject to any limitations. Further, it will be deductible from ordinary income.

Create a Trust

Trusts are advantageous for the control they give you, as already mentioned above. Additionally, all assets placed in a trust avoid the probate process, meaning they help to protect your family’s privacy. You can appoint a knowledgeable and trusted person or company to manage the trust assets and control distributions to your children and grandchildren. If you choose an irrevocable trust, it is considered a gift and you can no longer control the assets – or take them back. With a revocable living trust, however, you can control the assets while you’re alive, then they pass to your heirs through your estate.

8.    Don’t Skip the Legal Details

As you plan your estate, be sure to use the services of an estate attorney along with a financial planner with experience in estate planning. This will help you ensure all the legal details are taken care of so that your estate plan will play out according to your wishes. This includes ensuring you have a legally drafted estate planning documents, that your beneficiaries are squared away on all accounts, and that you are familiar with what the probate laws in your state will mean for your assets when you pass.

Final Thoughts on Passing an Inheritance to Your Children

Estate planning is never one-size-fits-all, so it is wise to consult an attorney and a financial planner to be sure you’re made choices that make the most sense for you. When you properly evaluate options for distributing your assets to your loved ones, you can be sure that your wishes are met, while also providing maximum flexibility for your heirs.

Would you like to work with a financial advisor to devise an estate plan that serves your needs and helps you meet your goal of passing an inheritance to your children? Please contact us today! At Wade Financial Advisory, we currently serve clients working for companies such as: Tesla Motors, Facebook, Nvidia, Applied Materials, Apple, Microsoft Corporation, Google, Intel, Cisco Systems, Hewlett Packard, Pure Storage, Zoom Video Communications, Amazon, Adobe Inc., and many others. We would be delighted to serve you and your family, too.

This communication contains the opinions of Wade Financial Advisory, Inc. about the securities, investments and/or economic subjects discussed as of the date set forth herein. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENTS BEAR RISK INCLUDING THE POSSIBLE LOSS OF INVESTED PRINCIPAL.

Wade Financial Advisory, Inc. is an investment adviser registered with the Securities and Exchange Commission. Registration of an Investment Advisor does not imply any level of skill or training. A copy of current Form ADV Part 2A is available upon request or at Please contact Wade Financial Advisory, Inc. at (408) 369-7399 with any questions.

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