There’s no such thing as free money, including money you inherit. Just like lottery winners who suffer unintended consequences when given a pile of cash, people inheriting money and property from their parents may find themselves scrambling through a variety of pitfalls.
Make no mistake: Inheritance is a huge facilitator of wealth (at least in families that already have it), and it’s an important piece in the financial puzzle for many Americans who plan on leaning on inheritance to pay off debt, establish financial stability, or prepare for their own end-of-life costs.
But with great inheritance comes great responsibility. And possible headaches. And probably lawyers.
So what are some helpful tips for folks with aging parents in line for an inheritance of some kind?
And of the various forms of inheritance (cash, property, stocks), are some easier to inherit than others?
For starters, life will be easier if you already have a great relationship with any siblings you might have — one that’s free of jealousy, resentment, or long-simmering competitive tension that may result in a protracted battle over who gets the Persian rug from the living room.
But since sibling relationships are already long-established, less-than-perfect family dynamics can be partially offset by a commitment to communicate open and honestly, with a shared goal of avoiding crippling legal fees that may trump the inheritance in question.
That’s a real risk: Many experts told Considerable that the inheritance process often involves dealing with an executor of the estate, and then going through probate court and the various costs associated with it.
This can be exhausting and time-consuming, and options that avoid probate should be considered.
In trusts, we trust
Patricia Russell, Certified Financial Planner (CFP) and founder of the personal finance blog FinanceMarvel, is a proponent of putting assets in a trust instead.
“Before your parents die, encourage them to set up a trust to distribute their assets,” Russell said. “A trust will allow your assets to go right to the beneficiaries while not having to go through probate. Trusts usually can avoid state probate along with the associated expenses that come with it.”
Philip J. Ruce, estate planning attorney and owner of Stone Arch Law Office in Minnesota, had a similar suggestion
In describing the difficulties of divvying up property among beneficiaries, Ruce recommends putting the property in a trust, so that “rules and guidelines can be created around who will be responsible for making decisions, who will fund repairs, or who would make decisions regarding the sale or rental of the property.”
Trusts not only can help avoid probate costs, they can be set up to provide more long-term stability and structure as opposed to a one-time payout that may get spent quicker.
The tradeoff is less immediate control over what you are inheriting, but it could end up saving money in the long run.
Russell offers a final take on setting up a trust: “If the asset is worth a significant amount, the taxes that they would have to pay could be astronomical. In the end, do your research on trusts and talk to a professional about setting one up.”
Inheriting property, if not in a trust, can be as simple as selling it and splitting the profits.
But that’s a best-case scenario. According to Ruce: “The family home is generally sold and the proceeds divided among whomever the parents wish, though it is usually the children.
Be careful who you appoint as your personal representative (‘executor’) or trustee; these decisions can be big ones and the settlement of an estate can be a tough job.”
Cash, on the other hand, is more straightforward.
“Cash is an asset that can most easily be divided among heirs,” Ruce said. “They will receive these assets easily and generally free of the probate court system, which is the administrative court proceeding whereby a representative is appointed to manage your estate.”
So if you can get cash, you should do it.
If there are other assets, including property, consider talking to your parents about setting up a trust to hold the assets and establish some sensible guidelines to dealing with the trust.
Inheriting stocks can be even more complicated and subject to a dizzying amount of tax ramifications, many of which are beneficial to the inheritor. The Motley Fool wrote about estimating the value of inherited stock, and if you are expecting to receive stocks as part of your inheritance, speak to an estate planning professional who can help guide you through the process.
Another thing to keep in mind: Plans change.
According to Michele Lee Fine, RICP, president of Cornerstone Wealth Advisory in Jericho, New York: “The biggest mistake and missed opportunity many people experience when it comes to estate planning, regardless of the level of wealth, is that they often think their documents are ‘one and done,’ and don’t take the time to revisit and review every couple of years to ensure they’re aligned with their current goals, concerns, and objectives.”
Fine stresses the importance of establishing a solid plan with your loved ones, then revisiting it. “There are no do-overs in legacy planning after you’re gone. Consulting with a lawyer and a financial representative is the best way to ensure you’ve covered all your bases. Because the documents are only as good as how they are being used.”
Inheriting anything, whether it be cash, real estate, or stocks, should benefit the heirs, not cause them confusion or frustration. Take the time to talk to your family and be prepared as best as you can for a transition of assets during a stressful period of family transition.