Tips For Leaving An Inheritance

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It is common for us to want to leave something behind to our heirs, and we must first fund our own lives in retirement, which can sometimes seem impossible. 

According to an Ameriprise Financial study, while 83 percent of people want to leave an inheritance, 64 percent feel they have a good chance of doing so. In addition to the pressure of leaving an above-average inheritance, there is the uncertainty of what to leave for different people.

The Average Inheritance in the United States

The average inheritance level varies according to different studies. There is a wide range of estimates. Race, education level, and certain income all affect average inheritance.

The study found the following results:

  • Inheritance in the U.S. averaged $46,200 between 2016 and 2019.
  • College-educated parents leave their children over $10,000 more in inheritance than parents without college degrees.
  • There is no estate tax on inherited estates under $11,700,000, but inheritors may owe a gift tax on assets over $15,000.

According to the Survey of Consumer Finances, inheritances from parents, grandparents, or other benefactors in the U.S. average about $46,200. The average income for the next nine percent is $174,200, a steep decline from $719,000 for the wealthiest one percent.

  • Average inheritance: $46,200
  • Average expected inheritance: $72,200

Data from the Federal Reserve also highlights critical differences in median inheritances between races and ethnicities:

  • Inheritance median for white families: $88,500
  • Black families’ median inheritance: $85,800
  • Inheritance among Hispanic families: $52,200

Over the past century, inherited wealth has accounted for 50 to 60 percent of U.S. private wealth, according to the Organization for Economic Cooperation and Development.

Parental Inheritance

From 2016 to 2019, the average inheritance received from parents with a college degree was $92,700, according to the Federal Reserve. A parent without a degree typically leaves an inheritance of $16,500 less.

Children of parents with degrees are also twice as likely to expect inheritances. In contrast, only 9.5% of individuals who have parents without a college degree expect to receive assets passed down to them, compared with 23.6% of those who have parents with degrees.

Inheritance Taxes

Inheritance taxes vary based on the type of inheritance, and heirs are usually not required to file an estate tax return when inheriting an estate. According to the Internal Revenue Service, this is true unless the estate exceeds $11,700,000.

There may not be any estate tax for inheritors, but there will probably be a gift tax. According to the IRS, the annual exclusion limit for this tax is $15,000 from 2018 to 2021.

For a better understanding of inheritance tax, you should talk to a financial advisor. 

What is a Large Inheritance?

An inheritance can be of any size, but $100,000 or more is generally considered a large inheritance. Receiving such a substantial sum may seem intimidating if you’ve never handled money of that magnitude before. Don’t let your inheritance go to waste. Think about how you can maximize it before you spend it on a new sports car or vacation home. Before making any quick choices, please talk with a financial advisor about your options and make a plan before spending it. Investing, saving, and spending your money can be figured out with the help of a financial advisor.

Tips for Leaving an Inheritance

If you want to give specific assets to different individuals, consider who would benefit most. The amount you leave your heirs should also be considered. Additionally, it is essential to determine each person’s individual needs and level of understanding of money. This might affect how much you give as well as how you give it to them.

Your Expectations

It is important to know what assets you can afford to leave behind. Don’t forget to subtract retirement savings or other financial instruments you’ll need until you’re gone. Giving realistically is always better than giving excessively. If you give too much, your heirs may be left to pay for your end-of-life expenses with their inheritance. There may be arguments and tension within the family about who should be responsible for paying these bills later.

Inheritor’s Understanding of Money

Before giving an heir a considerable amount of money, be sure they won’t waste it. Test your heir with a few thousand dollars to learn how they will handle large sums of money. 

By looking at how they use the money, you can see how more significant amounts might be spent. Consider gifting them the money outright if they use it wisely. If they do not understand how to use money effectively, it may be a good idea to put the money in a trust or purchase a single-premium deferred annuity.

Options to Consider

As previously mentioned, not everyone is good with money. Knowing what options are available to you is a wise way  to ensure that your heirs have the money when they need it. The following options might be better than just giving them the money:

Basic trust account – Legally transferring property

Roth IRA – A beneficiary-designated investment account

Annual cash gift installments –Making cash gifts every year to avoid heavy taxation

Grantor Retained Annuity Trust (GRAT) – Trusts that allow you to leave large inheritances without the tax consequences

Dealing with Heirs’ Expectations

Whenever there is the possibility of inheriting any asset, it’s easy to get carried away. In the absence of clear expectations, this can cause disappointment and frustration. Talk to your heirs about their expectations, and use those expectations to guide the conversation. It can be helpful to prepare ahead of time for potential problems, such as disappointment with a smaller inheritance than average, so you know how to handle the situation effectively. You should explain to your heirs what they can realistically expect.

Communicate

It is possible to eliminate hostility and confusion between family members later on by having clear communication. Ultimately, you decide who you want to share your financial information with. If your children’s inheritances look different, explaining them to each child can go a long way.

How and When to Give Your Children or Grandchildren Inheritance Money

Choosing when to give an inheritance depends on various factors, but there is no correct answer. Situations are unique, so they should be treated accordingly. You should determine the best time for each individual to receive their inheritance if you give an inheritance to more than one person.

Be cautious when giving inheritance money to your kids or grandkids before you pass away. Keeping their inherited assets until after death can help ensure you have enough money to pay for end-of-life care and other costs.

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