3/16/2012 3:50 PM ET|
Banking on inheritance? Good luck
The passing of parents rarely results in a financial windfall. And even if you are an heir, what you receive could come with taxes, fees or strings attached.
If you've struggled to get ahead financially for most of your life, you might see an inheritance from your parents as your best chance for becoming financially comfortable or even wealthy. But counting on an inheritance to solve your financial problems is a bad idea. Most importantly, receiving an inheritance requires the death of people you love. Further, you might not get the windfall you were expecting. Here's why:
Your parents might spend the money themselves
Your parents worked hard for decades to earn their nest eggs, and they may not be planning on leaving much behind. If they're fortunate enough to have more than they need to retire comfortably, they might spend the extra money on luxuries they couldn't afford when they were younger. Also, health care costs eat up a significant portion of most people's retirement savings, and with all the uncertainty surrounding the Patient Protection and Affordable Care Act, it's impossible to predict what health care costs will look like in the future. If your parents live longer than anticipated, their retirement savings may simply run out. In fact, you might end up supporting your parents in their old age -- quite the opposite of an inheritance.
The fine print in your parents' retirement plans could also limit what you receive when they die.
"Retirees that are currently in retirement tend to have defined-benefit pension plans, and once they die, so does the payment stream," says Michael J. Fitzgerald, the president of Fitzgerald Financial Partners, a fee-only financial adviser in Houston.
You don't know what you're getting
Some parents tell their children exactly what they plan to leave when they die. Other parents prefer to keep their financial affairs private. If your parents fall into the latter category, there's no point in counting on an inheritance; you don't know if your parents are planning to leave you $500,000 or $1. And they might be planning to leave their assets to a favorite charity, or they might not have any assets. If you have siblings, any money your parents leave likely will be divided among you.
A typical inheritance won't change your life
Many people don't receive any inheritance, and of those who do, the median inheritance for today's baby boomers is only $64,000, according to a 2010 study from the Center for Retirement Research at Boston College. That's nothing to sniff at, but it's probably not enough to dramatically change most people's lives.
In fact, you might burn through any money you do receive. Estate planning attorney John O'Grady, of San Francisco, says that most people quickly spend an inheritance of any amount unless they create a long-term plan for the windfall. Without a plan, the heirs may spend the money on big-ticket items, debt payments or donations, especially because they are not thinking clearly in the aftermath of a loved one's death.
Probate and taxes often take a bite
If your parents don't do any estate planning before they pass away, the assets they leave you could take a significant hit from probate and taxes. Probate is the process by which a court reviews the deceased's will for validity and authenticity, and appoints the executor named in the will to distribute the deceased's assets. If there is no will, the person is said to have died intestate. Probate will then appoint an administrator to distribute the assets according to state laws. Regardless of what your parents may have wanted, if they didn't formalize their wishes in writing, the state will make the decisions about their assets.
The court and attorney fees associated with probate typically reduce the value of the deceased's estate by 3% to 7%. The estate administrator or executor may also charge a fee; settling an estate can be a complex and time-consuming job. If anyone contests the will, these fees will increase. Also, the probate process can take as long as two years, which means that even if you are due an inheritance, you may be waiting longer than you thought to receive it.
Your parents can avoid probate and its associated fees and waiting period by creating a trust and placing their property in it, but many people never establish trusts because they don't understand them or think they are only for rich people. Trusts aren't just for the wealthy, though, and a qualified estate-planning attorney can explain how they work and help parents establish the best financial arrangement.
Whether your inheritance will be subject to estate taxes depends on its size and on ever-changing state and federal estate-tax exemptions. In 2012, the federal estate tax exemption is $5,120,000.
The money could come with restrictions
If your parents place their assets into certain types of trusts, they can continue to control their money even after they're gone. For example, parents can use an incentive trust to reward beneficiaries with trust money for particular behaviors, such as earning a college degree, holding a job or working in the family business. They can also use trusts to punish undesirable behaviors, such as illegal drug use, by withholding money from would-be beneficiaries. Trusts can also be set up so beneficiaries receive their inheritance gradually as they reach certain age milestones.
The bottom line
"Relying on an inheritance can diminish an individual's work ethic and feeling of self-worth," says Andrew M. Aran, a financial adviser and partner with Regency Wealth Management in Midland Park, N.J.
Further, there are many uncertainties surrounding whether you will receive an inheritance, and how large it will be. For all of these reasons, the best way to provide for your financial future is to take steps you have complete control over, such as maximizing your income, minimizing your expenses, budgeting wisely and funding your own retirement account.
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My parents set up their estate years ago. Planning was (is) always a big thing when it came to finances and such. They also taught us that if you're not spending more than you're making, you'll never be broke. That seems to be good advice not only for retirement planning, but also everyday living too. My parents retired 11 years ago, and their net worth climbs every year. I can understand parents not wanting to leave their kids too much money, as they might become lazy or complacent. But I also can't understand parents who don't seem to mind leaving their kids with a bunch of debt. I know that debt cannot be transfered to the next generation, but too many times I have seen parents leaving no money whatsoever, yet telling their kids they expect these extravagant funeral proceedings (high-end coffins, plots, services, etc.). and these kids feel guilty if their parents wishes are not honored, even taking on a debt burden that they can't afford. What you do with your money is your business; spend it however you like, die broke if that is your goal, but don't be so selfish as to expect someone else to pay for your final expenses.
I expect nothing as well. I want my Mom to enjoy herself and use whatever money she has: she worked very hard to raise us and she deserves to spend any money she may have as she pleases.
We have a daughter who will inherit whatever we manage to keep the government from taking. Our money will go to a trust that rewards her with a dollar for dollar match for money she earns if she is age 20-30 and a 2 for one match after that. If she doesn't work she will not get anything. The trust is set up so she can not borrow against it.
We are doing our best to insure she develops a good work ethic but feel any lump sum of money might cause her to faulter in her efforts to establish a career and save on her own. Our hope is she will use the trust when she is younger to supplement her wages and eventually add money back to the trust for her children.
We believe in generational wealth. Each generation struggles to put a bit away for future generations and the family wealth grows over generations. The idea is that eventually a grandson or daughter might have enough to be able to follow a meaningful career path that might not provide enough monetary gain. Or a portion of the trust can be given to charitable causes to help others in need.
The trust also prevents the unfortunate circumstance where our daughter might fall in love with some one who is primarily interested in the money and after grabbing a good share leave. None of the trust money is our daughters until she earns it so it is not subject to property division in the event of a divorce.
1 hour ago
"In the land of entitlement it is only right that we redistribute our wealth to those who have not earned it"
The same people making this statement are the ones trying to weasel their way out of their homes through short sales and foreclosures, leaving the rest of us with the bill.
Good, sound advice. The last sentence says it all " ...maximizing your income, minimizing your expenses, budgeting wisely and funding your own retirement account." Especially these days, don't count on anyone but yourself for your future
My mother bought jewelry to be distributed among me and my sisters after her death, as a "legacy" (her word for it). Much more meaningful than money.
My father sometimes talks about what he wants us to do "after I'm gone," and says he wants everything to be divided fairly amongst all the children. I have told him time and again that it is his money, house, etc. and he should do as he wishes with it. I am not going to stress out if I get less than someone else.
I don't understand the mentality of waiting for an inheritance - or the mentality of scrimping and saving so you can leave an inheritance. Doesn't anyone want the satisfaction of succeeding on their own merits anymore?
I don't care if i get a dime, although my mom and dad are good with money and i am sure they will leave something. I have always told them just leave enough to bury you, or else it will be a "HEFTY bag by the Sea " funeral (kidding of course)
There is nothing you can do about taxes and fees, besides, if after everything I only get , say, 10k then that's 10k i didn't have before. I will be thankful for it and use it to spend time with family (which they would approve of)
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