Planning for wealth transfers, whether you are the person doing the giving or the recipient, is essential to avoid expensive surprises, says a recent article from Go Banking Rates, “Wealth Transfers: 9 Unexpected Obstacles to Plan For Before It’s Too Late.”
Wealth transfers fall into two categories. Beneficiary wealth is wealth passed from your estate to beneficiaries. The second is legacy wealth, which is when entities, like trusts, are created to pass wealth on in perpetuity. The first step in planning for wealth transfer is deciding what you want to happen to the wealth you’re passing on.
The next step is figuring out the tax implications of the wealth transfer. A traditional IRA or 401(k) account is tax-advantaged, while non-qualified assets include stocks, bonds, investment accounts and Certificates of Deposit (CDs). Unless they fall into certain categories, an heir receiving an inherited traditional IRA must empty the account within ten years with Required Minimum Distributions and pay income taxes on those distributions. For this and many other reasons, estate planning includes tax planning.
Estate planning includes articulating your wishes for how wealth is to be passed. Without having a will prepared by an estate planning attorney, you risk your entire estate being tied up in court probate proceedings for months or even years. Fights among family members are more likely to occur when your wishes aren’t made clear through enforceable legal documents.
You’ll also want to discuss your estate plan with your family. A sudden inheritance, if not expected, could create tax issues, sow discord between family members and lead to expensive litigation if some feel they were treated unfairly.
People think they don’t need an estate plan because they are too young, still healthy, or don’t have enough assets to warrant taking the time to create an estate plan. This is simply not true. Anyone over the age of 18 will benefit from having an estate plan. An estate plan includes preparing for incapacity and creating documents, like a Power of Attorney and Healthcare Proxy, so someone else can take care of you if you are injured or too sick to communicate your wishes. As you accumulate more assets and age, these documents need to be reviewed and updated to reflect changes in status.
A commonly overlooked and often expensive mistake in estate planning is to neglect to check and update beneficiary designations. This lesson is learned when people get divorced or remarry. When the spouse passes, the new spouse is stunned to discover the recipient of these accounts goes to the prior spouse.
Don’t forget to leave specific instructions in writing for tangible assets. This may include real estate property, cars and houses. Some people want to give their children the family home but have them sell it immediately to take the cash. If your wishes aren’t expressed, don’t expect them to be followed.
Speak with an estate planning attorney before it’s too late to put your wishes into an estate plan. Talk with your family about your estate plan. Making sure everyone knows what you want and putting it down on paper will protect your wishes and your loved ones.
Reference: Go Banking Rates (Jan. 24, 2025) “Wealth Transfers: 9 Unexpected Obstacles To Plan For Before It’s Too Late.”