Deciding whether to leave an inheritance for your children impacts the amount you save, the retirement plans you choose, and how you take qualified retirement plan distributions; however, beyond your desire to leave some wealth to your children (or not), there are some essential personal financial issues to consider.
Key Takeaways
- Whether to leave an inheritance for your children impacts your retirement plans, how much you save, and your retirement plan distributions.
- Before deciding to leave an inheritance, personal financial issues should be considered, including your income needs and potential healthcare costs.
- Retirees can risk running out of money in retirement and should consider any tax implications of establishing an inheritance.
- Establishing a trust or gifting assets to loved ones can be effective ways to transfer assets, but there are rules and limitations.
Consider Your Income Needs
Some retirees give away their retirement savings without considering their own income needs. Before you make gifts to others, it's important to assess how much you need to spend on yourself. Retirement calculators such as those available from AARP can help you determine how much you need to save and how much you can withdraw each year once you retire.
Be sure to take into account the impact of inflation and taxes and maintain a diversified portfolio of growth and income investments that can help your portfolio keep pace with inflation.
Plan for Rising Healthcare Costs
The biggest risks to your retirement income and your children's inheritance are unexpected illness and high healthcare costs. Government programs are often of little assistance when it comes to paying for nursing homes and other forms of long-term medical care. Medicare covers a limited amount of nursing home care, and Medicaid requires that you spend almost all of your own money before it pays for long-term care.
You cannot simply transfer assets to family members to qualify for Medicaid, as the program restricts benefits if asset transfers were made within several years prior to a nursing homestay.
Some people protect their assets from the costs of catastrophic illness with a long-term care insurance policy, which can be purchased either individually, through an insurance agent, or through a group plan with an employer; however, these policies are very expensive and have a number of coverage limitations, so you should consider them carefully.
Outliving Your Nest Egg
What if you outlive your retirement fund? When you are over 90 years old, your children and grandchildren may celebrate every birthday gratefully. But if you have spent your nest egg, they may also be paying some or all of your bills. With longer life expectancies, it's essential to manage retirement-plan withdrawals to avoid depleting assets during your lifetime.
As a solution, you could buy an immediate annuity with some of your retirement money to ensure that you receive a guaranteed amount for at least as long as you live. Certain pension and retirement plans may allow you to stretch payments over single or joint life expectancies rather than receive the proceeds as a lump sum.
Consider the Tax Implications
If you expect to inherit assets from your parents, you may be in a better position financially than someone who does not expect to receive an inheritance. Keep in mind that certain inherited assets, such as stocks and mutual funds, are eligible for favorable tax treatment called a step-up in basis. If you are leaving assets to others, this tax treatment could mean significant savings for heirs.
Also, be aware that if you inherit an IRA, you may have to abide by certain rules regarding when you take distributions. Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, non-spousal beneficiaries of an IRA must take full distribution of all amounts held in the IRA by the end of the 10th calendar year following the year of the IRA owner's death.
The 10-year rule eliminates what was previously called the "stretch IRA," a financial planning tactic that allowed beneficiaries to stretch their required minimum distributions (RMDs) over their life expectancy and extend the tax-deferred status of an inherited IRA.
Exceptions to this SECURE Act rule are beneficiaries designated as the surviving spouse, a child of the IRA owner who has not reached the age of majority, disabled or chronically ill individuals, and individuals who are not more than 10 years younger than the IRA owner.
Set Up a Trust
It may make sense to set up a trust to control distributions from the estate to the surviving spouse and children in certain situations. If you or your spouse have children from previous relationships and don't have a prenuptial agreement, trusts can ensure that specific assets are passed to designated children.
Children who are well off may prefer that you keep every penny of your nest egg rather than hand it over during your lifetime. Discuss the transfer of your estate with them.
Choose Investments Wisely
Those with very large estates may expect children to pass inherited assets to grandchildren. A portfolio designed to last multiple generations should grow, preserve capital, and generate income with investments like growth and income equities and a portfolio of laddered bonds. Inheritors who wish an estate to last several generations should withdraw income only and avoid dipping into principal.
Estimate the amount of the inheritance you will leave to your children by considering rising prices or inflation as well as years of compounded investment growth.
How to Leave Your Legacy
Once you have considered all your options, there are several methods to pass along funds to your loved ones.
Gift Assets
Gifting assets is one way to allow loved ones to make use of your money while you are still alive. Gifts qualifying for the annual exclusion from gift tax—often called "annual exclusion gifts"—are entirely tax-free and do not require filing a gift tax return.
A separate annual exclusion applies to each person to whom you make a gift. The annual gift tax exclusion is $16,000 for 2022 and $17,000 for 2023.
While gift recipients will not receive a step-up in cost basis, any capital gains will be taxed at their applicable rate, which may be lower than yours.
Some people gift to children or grandchildren using custodial accounts set up under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA); however, depending on a recipient's earned income and status as a student, the earnings in the account may be taxed at the donor's tax rate rather than the child's rate. Others may opt to open a joint account with the minor child or buy savings bonds in the child's name.
Bequests made to charities are not subject to any limitations and are deductible from ordinary income.
Create a Trust
Trusts protect your children's interests, and the assets in them avoid probate (which maintains privacy). You can appoint a company—such as the one that helped you build the trust—or another knowledgeable and trusted person as the trustee to manage assets and control distributions from the trust.
An irrevocable trust is considered a gift, so you can't control it or take it back; however, with a revocable living trust, you own and control the assets while you are alive, then they pass to beneficiaries as part of your estate.
Defer Income
Retirement accounts such as deductible IRAs and 401(k) plans defer taxes on capital gains, interest, or dividends from investments until the money is withdrawn when it is taxed as ordinary income. If you anticipate being in a higher tax bracket at retirement than you are now, a non-deductible Roth IRA allows earnings to accumulate tax-free, and there are no taxes on withdrawals.
Life Insurance or Tax-Deferred Variable Annuities
With life insurance, your beneficiaries receive the proceeds tax-free, without having to go through probate or worrying about stock market fluctuations. Fixed or variable annuities allow you to participate in the stock market through mutual funds or fixed-income investments and have a life insurance component; however, these policies often carry hidden charges and fees, so it's important to shop around and study them carefully.
Additionally, the SECURE Act has made annuities that are held in a 401(k) plan portable. This means that people who inherit an annuity that's part of a 401(k) can transfer the annuity into another direct trustee-to-trustee plan. This eliminates the need for the beneficiary to immediately liquidate the annuity, which could trigger surrender charges and fees.
Estate Planning Legal Details
Make sure you take care of the legal details to ensure your estate plan will work the way you want it to. An estate attorney or a financial planner who specializes in estate planning may be helpful in understanding these details further.
Beneficiaries
- Review the beneficiaries on all accounts.
- Changing beneficiaries may require your spouse's consent.
- List secondary beneficiaries in case your primary beneficiary dies before you.
- Your retirement accounts pass to beneficiaries without going through probate court, but if you leave a retirement account to your estate, it may have to go through probate before the assets can be distributed.
Probate
- Know the probate laws in your state.
- Investment accounts without a joint owner or documented beneficiary may have to go through probate to change ownership, a potentially long and costly process.
Wills
- Draw up a will.
- Dying without a will (called "dying intestate") means that state law determines how your investments are divided among relatives.
- If you have no living relatives and no will, your assets escheat back to your state of residence.
What Is the Best Way to Leave an Inheritance to Your Children?
There are many ways to leave an inheritance to your children and what is best will be different for every family. One good way is to leave the inheritance in a trust. The trust can be set up with some provisions, such as the inheritance being distributed in chunks over time. A trust can also remove the issue of probate, allowing the inheritance to pass without issue.
How Much Can You Inherit From Your Parents Without Paying Taxes?
The federal government does not charge an inheritance tax, but some states do. The federal government does charge an estate tax that is passed onto beneficiaries. The estate tax is only levied on estates with a value greater than $12.06 million in 2022 and $12.92 million in 2023. The portion that is greater than these values is the portion that is taxed.
Should You Leave Inheritance to Your Children?
The decision to leave an inheritance to your children or not will differ for every family depending on the relationship of the family members. In general, leaving an inheritance to your children is good in that it helps them through life, eases their financial burden, represents your love and care to them, and shows that you did well enough in life financially to be able to leave something to your family.
The Bottom Line
The above suggestions may not be right for everyone, so it's important to consult an attorney or tax advisor to determine which makes the most sense for you. Evaluating distribution options for your nest egg will help ensure your wishes are followed while maximizing flexibility for your heirs.
FAQs
Use a trust to eliminate uncertainty.
If you want to make sure your children use the money wisely, consider putting it in trust with a few strings attached. Many estate planning attorneys recommend distributing the assets in chunks (typically one-third at age 25, one-third at age 30 and one-third at age 35).
Should you leave inheritance to your children? ›
In general, leaving an inheritance to your children is good in that it helps them through life, eases their financial burden, represents your love and care to them, and shows that you did well enough in life financially to be able to leave something to your family.
Where in the Bible does it say leave an inheritance to your children? ›
Proverbs 13:22: “A good man leaves an inheritance to his children's children.” (NKJV) This verse keeps our life goals, our vision and our legacy front and center when we're choosing how to use our money today.
How do you pass down an inheritance? ›
A strategy that many wealthy families use to pass on assets to younger generations is a trust. A trust is a contract between someone who owns property (a grantor) and a person (called a trustee) who agrees to manage and distribute it to those ultimately entitled to receive it (the beneficiaries).
How do I leave my inheritance to my daughter but not son in law? ›
Prenuptial Agreements
A prenuptial agreement can help you protect any inheritance that you plan to give to your child by: Stating that any gifts or inheritances received by either spouse during marriage remain separate property and not subject to division upon divorce.
Can I leave everything to my son and not my wife? ›
If you leave money to your children through an irrevocable trust, technically the trust owns the money – not the beneficiary. An irrevocable trust can protect your assets and require the trust executor to follow your exact wishes for the distribution of your assets, even if your child dies or becomes divorced.
What is the best age to inherit money? ›
As child turns 40 to 45 years old, giving them their full inheritance can be the better move. It's a simplified estate plan, less costly to manage, and there may no longer be a need for the benefits of a trust that I've mentioned. There are always some exceptions, of course.
What percentage of parents leave an inheritance? ›
According to a Natixis U.S. Investor Survey as cited by CNBC.com, almost 70 percent of young people expect to get an inheritance, but only 40 percent of parents plan to leave one.
How much can you inherit from your parents without paying taxes? ›
There is no federal inheritance tax, but there is a federal estate tax. The federal estate tax generally applies to assets over $12.06 million in 2022 and $12.92 million in 2023, and the estate tax rate ranges from 18% to 40%.
What is the biblical law of inheritance? ›
The law of intestate succession in Numbers 27:8 provides that if a man has no son, "his inheritance [shall] pass to his daughter." Refer- ence to "his daughter" might be read to mean that only one daughter, perhaps the older or oldest, would inherit.
Scripture says that “A good man leaves an inheritance for his children's children” (Proverbs 13:22). As a result, many Christians defend and justify leaving vast sums of wealth to their children and grandchildren.
What does the bible say about not providing for your family? ›
1 Timothy 5:8
“But if someone doesn't provide for their own family, and especially for a member of their household, they have denied the faith. They are worse than those who have no faith.”
What are the basic rules of inheritance? ›
The three laws of inheritance proposed by Mendel include: Law of Dominance. Law of Segregation. Law of Independent Assortment.
Do I need to report inheritance to IRS? ›
Regarding your question, “Is inheritance taxable income?” Generally, no, you usually don't include your inheritance in your taxable income. However, if the inheritance is considered income in respect of a decedent, you'll be subject to some taxes.
Is it better to inherit cash or property? ›
Cash is king of inheritance assets.
It's simplest to deal with and the value is crystal clear. If you have accounts in multiple financial institutions, consolidate cash into one account. Each bank may have different rules for distributing assets, so reducing the number of banks involved will make it easier.
How do I keep my inheritance away from my son in law? ›
There are a couple of ways to protect an inheritance from in-laws, starting with establishing a trust. For example, you might create a family trust which allows you to leave assets to family members. The trust terms can specify that anyone who is not a blood relative can be excluded from receiving assets.
Can an estranged child claim my inheritance? ›
Estranged children still will be entitled to an inheritance, but it may be smaller in comparison to children who have remained close to parents. Second, parents may leave an inheritance for their child in a testamentary trust.
Why leave inheritance to grandchildren? ›
Leaving Assets with the Grandchild's Parents
Many grandparents decide that the best way to provide for their grandchildren is to leave their assets to the grandchildren's parents. This typically ensures the financial stability of that family unit, thereby indirectly benefiting the grandchildren.
Can my parents leave me out of their will? ›
Generally, yes, it's possible to disinherit a child and prevent them from receiving any assets from your estate after they pass away. To disinherit a child you'd need to explicitly state in your will that you do not wish for them to receive any of your assets.
Does inheritance go to kids or spouse? ›
Most often, the spouse inherits the estate. If there is no spouse, then it is usually the children. If there are no children, the next of kin relationship continues to find the closest living blood relative.
The Spouse Is the Automatic Beneficiary for Married People
A spouse always receives half the assets of an ERISA-governed account unless he or she has completed a Spousal Waiver and another person or entity (such as an estate or trust) is listed as a beneficiary.
What is the 7 year rule for inheritance? ›
No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7 year rule.
How much inheritance is too much? ›
That said, an inheritance of $100,000 or more is generally considered large. This is a considerable sum of money, and receiving such a windfall can be intimidating, especially if you have limited experience managing excess funds.
Do most millionaires inherited their money from their parents? ›
Dave Ramsey, personal finance expert and founder of Ramsey Solutions, says this myth of primarily inherited riches is “flat wrong.” When Ramsey's National Study of Millionaires asked where the riches came from, they found that a whopping 79% didn't receive any inheritance from parents or other family members.
How much money does the average American inherit? ›
The Federal Reserve's 2019 Survey of Consumer Finances (SCF) found that the average inheritance in the U.S. is $110,050.
Does inheritance affect Social Security? ›
Income from working at a job or other source could affect Social Security and SSDI benefits. However, receiving an inheritance won't affect Social Security and SSDI benefits.
Which parent do you inherit more from? ›
We inherit more genes from our maternal side. That's because it's the egg, not the sperm, that hands down all of the mitochondrial DNA. In addition, the W chromosome has more genes.
Does inheritance count as income? ›
Inheritances are not considered income for federal tax purposes, whether you inherit cash, investments or property. However, any subsequent earnings on the inherited assets are taxable, unless it comes from a tax-free source.
Can my parents give me $100 000? ›
Lifetime Gifting Limits
Each individual has a $11.7 million lifetime exemption ($23.4M combined for married couples) before anyone would owe federal tax on a gift or inheritance. In other words, you could gift your son or daughter $10 million dollars today, and no one would owe any federal gift tax on that amount.
Do beneficiaries pay taxes on inherited money? ›
Generally, beneficiaries do not pay income tax on money or property that they inherit, but there are exceptions for retirement accounts, life insurance proceeds, and savings bond interest. Money inherited from a 401(k), 403(b), or IRA is taxable if that money was tax deductible when it was contributed.
Mendel's Third Law: The law of dominance
Mendel concluded that different traits are inherited independently of each other, there is no relationship between them. This means that the inheritance pattern of one trait will not affect the inheritance pattern of another (as long as the genes are not linked).
What does Proverbs 19 say about inheritance? ›
Proverbs 19:14
Houses and riches are an inheritance from fathers: There are good things a man may receive as an inheritance, including material things such as houses and riches. A man is blessed to have such things.
What does inheritance mean in Ephesians 1 14? ›
This means that the grace of obtaining an inheritance is the glorious gift of Father and is connected to the other passive phrase in this sentence indicating that we have an inheritance because Father has also done the work to predestine us in rescue from our lost state.
Where in the Bible does it say money Cannot save you? ›
Money cannot protect you from death. People might cheat the righteous and trust in their wealth on this earth. But one day they will leave this earth, just like everyone else. Their money cannot extend their life past the point where God has ordained that it will end.
What does the Bible say about helping parents financially? ›
“Anyone who does not provide for their relatives, and especially for their own household, has denied the faith and is worse than an unbeliever” 1 Timothy 5:8.
What does the Bible say about family finances? ›
Successful family finances begin with the payment of an honest tithe and the giving of a generous fast offering. The Lord has promised to open the windows of heaven and pour out great blessings upon those who pay tithes and offerings faithfully (see Isaiah 58:6–12; Malachi 3:10).
What does the Bible say about disrespectful family members? ›
Repeatedly, God warns children to honor their parents with loving hearts of obedience (Exodus 20:12, Ephesians 6:2). Mouthy and sarcastic children who demean or belittle their parents' leadership and decision making are clearly on a path to destruction. King David's son, Absalom, is one such example in the Bible.
Does the Bible say to take care of your family first? ›
8 Whoever does not care for his own relatives, especially his own family members, has turned against the faith and is worse than someone who does not believe in God. 8 Everyone should provide for his own relatives. Most of all, everyone should take care of his own family. If he doesn't, he has left the faith.
What does the Bible say about financial responsibility? ›
1 Timothy 6:17: "Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain, but to put their hope in God, who richly provides us with everything for our enjoyment.”
What is the first rule of inheritance? ›
The first law of inheritance is the law of dominance. The law states that hybrid offspring will only inherit the dominant characteristics in the phenotype. The alleles that suppress a trait are recessive traits, whereas the alleles that define a trait are known as dominant traits.
There are five basic modes of inheritance for single-gene diseases: autosomal dominant, autosomal recessive, X-linked dominant, X-linked recessive, and mitochondrial.
Do I have to pay taxes on a $10 000 inheritance? ›
In California, there is no state-level estate or inheritance tax. If you are a California resident, you do not need to worry about paying an inheritance tax on the money you inherit from a deceased individual. As of 2023, only six states require an inheritance tax on people who inherit money.
Which states have no inheritance tax? ›
The states with no state estate tax as of mid-2023, are Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, ...
How do I deposit a large cash inheritance? ›
A good place to deposit a large cash inheritance, at least for the short term, would be a federally insured bank or credit union. Your money won't earn much in the way of interest, but as long as you stay under the legal limits, it will be safe until you decide what to do with it.
What is the most difficult asset to administer in an estate? ›
Probate or Non-Probate Assets
One of the most challenging parts of administering an Estate can be discovering the assets of the decedent. While many Executors or Administrators know about a decedent's financial affairs because they were once the decedent's caretaker, that is not always the case.
How to avoid paying capital gains tax on inherited property? ›
Here are five ways to avoid paying capital gains tax on inherited property.
- Sell the inherited property quickly. ...
- Make the inherited property your primary residence. ...
- Rent the inherited property. ...
- Disclaim the inherited property. ...
- Deduct selling expenses from capital gains.
5 Ways to Avoid Paying Taxes on Inherited Property
- Sell the Inherited Property as Soon as Possible. ...
- Turn the Inherited Home into a Rental Property. ...
- Use the Inherited Property as a Primary Residence. ...
- 1031 Exchange. ...
- Disclaim the Inheritance.
From this perspective, you should gift as much as you can comfortably afford during your lifetime, while remaining aware of the capital-gain-basis step-up available for inherited assets. So, gift your assets that have minimal gains and save your most appreciated assets for inheritance.
How do I pass wealth to heirs tax free? ›
There are some steps you can take to minimize taxes, though, giving your heirs an advantage:
- Gift Your Money. Start by gifting your heirs money every year. ...
- Convert Retirement Accounts to Roth Accounts. ...
- Life Insurance. ...
- Annuities with a Death Benefit. ...
- Real Estate. ...
- Investment Accounts.
The most common way to give an inheritance before death is to write a will and designate specific beneficiaries. This may be done in one of two ways - either by leaving the property or money directly to the person who you want to get it or by placing it in trust so that it goes directly to them after your death.
Inheritances are not considered income for federal tax purposes, whether you inherit cash, investments or property. However, any subsequent earnings on the inherited assets are taxable, unless it comes from a tax-free source.
How does the IRS know if I give a gift? ›
The primary way the IRS becomes aware of gifts is when you report them on form 709. You are required to report gifts to an individual over $17,000 on this form. This is how the IRS will generally become aware of a gift.
Does inheritance affect Social Security benefits? ›
Income from working at a job or other source could affect Social Security and SSDI benefits. However, receiving an inheritance won't affect Social Security and SSDI benefits.
What is the best way to transfer wealth to children? ›
Generational wealth transfer strategies to consider
- Beneficiaries. Naming beneficiaries on any of your assets and life insurance contracts is the easiest and most efficient way to transfer assets to loved ones. ...
- Wills. ...
- Trusts. ...
- Intrafamily loans. ...
- Annual gifting. ...
- Share your goals. ...
- Educate your beneficiaries. ...
- Form your team.
The IDT is an irrevocable trust that has been designed so that any assets or funds that are put into the trust are not taxable to the grantor for gift, estate, generation-skipping transfer tax or trust purposes.
Why do rich people put their homes in a trust? ›
To reduce income taxes and to shelter assets from estate and transfer taxes. To provide a vehicle for charitable giving. To avoid court-mandated probate and preserve privacy. To protect assets held in trust from beneficiaries' creditors.
