If you find yourself in the lucky position of either passing along your wealth to your heirs or receiving a wealth transfer from a relative, this is an exciting thing, but it does come with some legal and financial concerns if not done well.
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To save you and your beneficiaries from expensive hassles, experts offered nine obstacles to prepare for and get ahead of to avoid messy court battles or tax implications down the road.
Kevin Landis, a CFP, chartered financial analyst and senior vice president with Wealth Enhancement Group, said there are two main types of wealth transfers for those who are not uber-wealthy. The first is beneficiary wealth, leaving your estate to your beneficiaries, and the second is legacy wealth, setting up something that “goes on in perpetuity” such as a trust. You want to decide what kind of wealth transfer is right for you and your beneficiaries ahead of time.
“The bottom line though is just [creating a] vision of what you’d like to see done with your money,” Landis said.
If you don’t leave instructions for your vision, you not only lose control over how your wealth will be disbursed, but you could leave your heirs with a messy legal process on their hands to figure it out, too.
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Landis shared that the IRS considers wealth transfers such as IRA and 401(k) accounts as “tax qualified” because they have tax benefits. Nonqualified money includes such things as stocks, bonds, brokerage accounts and certificates of deposit (CD).
“So there’s a 10-year rule now that if the kids receive anything that’s tax-qualified, that money has to come out of that tax preferred environment within 10 years, but they lose up to a third of it in income taxes.”
With preplanning, heirs can create a strategy to offset some of that transferred income with other deductions to minimize taxes, he explained.
It’s not enough to just tell your beneficiaries what you want — it needs to be in writing, just in case anyone else contests the right to your money or assets, Landis said. Not having things in writing can send your estate to probate, a long, expensive and often protracted legal process that can also create bad blood among family members and other beneficiaries.
While it might seem like a generous thing to leave everything of yours to an heir, surprising them with these assets after your death might not be as kind as you think, according to Julian B. Morris, CFP, CEO and founder of Concierge Wealth Management. He recommended planning as a family, as long as it’s not a sudden death or incident. A sudden influx of wealth or assets often requires planning on the beneficiary’s part, as well for such things as tax mitigation and/or if there are assets that require selling or management.
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