The Wealth Counselor
Helping Clients with Anticipated Inheritances
When we think of estate planning, we often think about preparing our clients’ accounts and property to go to their loved ones in a tax-efficient way, protected from probate, disgruntled heirs, beneficiaries’ creditors, divorcing spouses, bankruptcy, and the poor spending habits of beneficiaries. We rarely consider helping our clients prepare for receiving an inheritance.
Believe it or not, there are several essential things a client must consider if they anticipate receiving an inheritance. Helping them understand these issues brings value to your professional relationship, ensuring that they return for your advice and counsel for years to come.
Understanding the Nature of the Property to Be Inherited
Whatever type of account or property it is, there are steps you can take to help the client plan to receive and manage it properly going forward. For example, if the client will receive a large IRA account from a parent, does the client understand the new rules associated with inherited IRAs implemented by the SECURE Act passed in late 2019? If not, you can provide crucial guidance on how to maximize the tax benefits available under the law regarding required distributions. If the client fails to understand these sometimes complicated rules, they could make an irreversible mistake and withdraw all of the IRA funds at one time, thereby substantially increasing their tax liability in the year of withdrawal.
Furthermore, by helping them plan to receive that inheritance, you may discover opportunities to help your clients properly invest and manage that inheritance under your own professional management. Doing so will allow you to continue to bring your expertise to the table for years to come for the benefit of your clients.
Powers of Appointment
If your clients know that they have been granted a power of appointment, encourage them to obtain a copy of the relevant trust documents to carefully review and determine the nature of these powers. With this information, you can properly advise them on the planning opportunities and tax consequences of their powers of appointment.
Keeping Inheritance Separate from Marital Property
Imagine Robin receives a cash inheritance from her deceased father of $300,000 and she and her spouse Morgan decide to use the inheritance to buy a vacation cabin in the mountains. When purchasing the property, the title company assumes that because they are a married couple, they want to take title to the property as joint tenants with rights of survivorship and the deed gets prepared and recorded accordingly. Further imagine that over the years, they furnish the property together, maintain it, and enjoy many family vacations there. One night, however, Morgan has a little too much to drink at a bar, gets behind the wheel, and causes a deadly accident that results not just in a DUI, but also in a wrongful death lawsuit. Because Morgan’s name is on the title to the property as a joint owner, Robin and Morgan discover that the family cabin is an asset that can be used to satisfy the lawsuit judgement against Morgan. As a result, they are forced to sell the cabin and use half of the proceeds to satisfy the judgement.
This unfortunate circumstance can be the result of Robin’s failure to keep her inheritance as separate property. By commingling her property with Morgan, she made it much easier for the judgment creditor in the lawsuit to reach what otherwise would have been considered Robin’s separate inheritance property.
Commingling inherited property can also lead to a similar result if Robin and Morgan ultimately divorce and the family court judge has to determine how to divide the marital property. Failing to keep the inherited property separate during marriage can often lead to that property being divided between spouses at divorce.
An inheritor’s trust includes the following benefits:
An inheritor’s trust can be a powerful tool to use for a client who anticipates receiving a large inheritance and would like to make sure that the inheritance is protected from certain tax consequences or threats from creditors.
Being prepared to discuss these important concepts with your clients is an important way to stay top of mind and bring value to your relationship. If you would like to learn more about any of these concepts, give us a call. We would love to discuss these ideas in greater depth with you so we can help you help your clients build and protect their wealth more effectively.
Law Offices of J.R. Hastings • 1003 Third Street, San Rafael, California 94901 • 415-450-6692