Planning for an Inheritance – 3 Helpful Tips

I work with many people who want to begin planning for an inheritance – often millions of dollars – when a parent or loved one passes away. However, many are often unprepared for the potential professional fees and the protracted legal process they may face before receiving any money. And without proper legal documents, the inheritance could be tied up in probate court for several months, even years. 

Without this information, some people make irreversible decisions that will significantly reduce their new wealth. For example, quitting your career and retiring early, thinking you will soon get your big inheritance, can jeopardize your financial well-being. 

Why plan for an inheritance?

I’ve worked with enough heirs of sudden wealth to know this is a difficult period or season of life. They often have just lost a loved one and are emotionally grieving for their loss. My clients have a lot of questions and possibilities for their future with the anticipated inheritance. 

To avoid making poor decisions and a long, drawn-out battle in probate court, here are four recommendations anyone can use to help plan for an inheritance.

1. Ask Your Parent About Your Inheritance

Many people planning for an inheritance have yet to have detailed conversations about their potential inheritance with their parents. Some assume they will be getting a large amount of money that will quickly be wired into their bank accounts once the parent has died. Others believe they will get an equal share with their siblings, only to find out later their share was less than expected. 

While it may seem uncomfortable, it’s important to speak with your parent or loved one about these issues before it’s too late. If possible, ask them to set up a call with their estate attorneys and financial advisor to learn more about what to expect in the future. We encourage the estate attorney to lead this phone call rather than your parent or loved one. 

2. Make Certain an Aging Parent Has the Right Legal Documents in Place Today

Once a parent passes away, a judge in a probate court could decide on how family assets will be distributed – in effect, who gets what if the correct documents are not in order. Many people have a Last Will & Testament that is old, which contains instructions on how their assets should be distributed. 

Problems can arise if assets such as retirement accounts or life insurance policies do not match the instructions in the will. Each state has different estate laws, and it is extremely important to have an estate attorney in your state of residence prepare the following documents:  

  • Medical Durable Power of Attorney – This document appoints an Agent to make health care decisions for you in the event that you are unable to do so.  
  • Health Care Directive/Living Will – This document expresses your wishes for the type of medical care you wish to receive when you are no longer able to make those decisions for yourself. 
  • Authorization for Use and Disclosure of Protected Health Information – If the powers granted to your health care agent will go into effect upon a specified event, it is advisable to have this document in place as well. This document addresses the Health Insurance Portability and Accountability Act (HIPAA) by enabling specific persons to have access to your protected health information, enabling them to discuss your potential incapacity with physicians. 
  • General Durable Powers of Attorney – This document appoints an Agent to make financial and legal decisions for you in the event that you are unable to do so.  
  • Last Will and Testament – This document provides instructions for how to distribute any individually owned assets at a person’s death. 

Another important document I encourage my clients to have executed is a Revocable Living Trust, which is a trust document created by an individual that can be changed over time. Revocable living trusts are used to avoid probate and to protect the privacy of the trust owner and beneficiaries of the trust, as well as minimize estate taxes. 

If your parent does not have these documents in place today, it’s probably time to contact an estate attorney and a financial advisor to help determine which documents may be needed for your specific circumstances and how to transfer the title of assets such as bank accounts and investment accounts into the title of the Revocable Living Trust. 

3. Don’t Spend Large Sums Anticipating a Quick Settlement

Many people count on an inheritance for their retirement plans and begin spending money on costly items such as home improvements, cars, etc. For many heirs, discovering that there is little to no money left after the distribution of a parent’s assets can create more personal financial stress. 

Avoid what I call “future” spending of any inheritance. Instead, speak with a financial advisor, tax advisor, and estate attorney about how each type of asset will be treated. 

For example, a traditional IRA may need to be rolled into a new inherited IRA. But be careful, as there may be additional tax implications depending on your age and your relationship with the deceased. 

Reach Out for Advice

Inheriting a large sum of money is often a once-in-a-lifetime experience, so most people need the guidance of a financial professional. If you have questions or would like more information about a financial plan for your inheritance, feel free to contact me at the Hadary Team for guidance on sudden wealth.

We offer a free consultation to discuss how a comprehensive financial plan may help enable your wealth to grow.

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