You’ve created your estate plan, you have an executor and you’ve chosen your beneficiaries, but equipping your loved ones with the skill to manage their inheritance – even a modest one -- is just as important. Preparing your beneficiaries for wise stewardship of a moderate inheritance involves educating them on financial literacy, setting expectations, and providing practical tools and resources. Here's a comprehensive guide to help you achieve this.
You will want to have an open conversation about the beneficiary’s current financial knowledge and experience. Often finances are ignored, and it can be hard to admit when we are not comfortable with a topic. However, having such a discussion with all beneficiaries is necessary and can set them up for success. Asking questions about their comfort level with finances and how they have handled finance-related questions in the past can get the ball rolling.
Help is available. MMBB offers a wide variety of resources. From our website to our newsletters to our financial planning specialists, we have tools ready to assist you in gaining the knowledge you can pass along to your beneficiaries.
Clearly communicate the expected amount of the inheritance to your beneficiaries to set proper expectations and eliminate any uncertainty. You should discuss the purpose of the inheritance with your loved ones. The funds may be for a specific purpose such as paying off a mortgage, sending children or grandchildren to school or for other uses. It is your money, and you can still have control over how it is utilized after you have passed away.
We recommend stating exactly what form the money is in. Many times, an inheritance may come in the form of a trust. The trust can have specific criteria for the beneficiary to meet for access to the funds. An inheritance can also come in the form of a life insurance death benefit, which is a payout from a life insurance company once the insured has passed away. The payout is generally not included in your gross income, and you do not have to report it to the IRS (IRS.gov). You can also pass on an investment account of stocks and bonds, real estate such as a house, or even collectibles. Having an open and honest discussion about the amount and purpose of these funds will help ensure a smooth transition.
Throughout your career, you have most likely had to budget, calculate what you are saving as opposed to what you are spending, and manage debt. These are vital skills that take time to develop and that you can help your beneficiaries attain. It is important that those who stand to collect the inheritance start to implement and refine these skills today.
We suggest you encourage financial planning and the benefits that it can bring. Perhaps you have your own plan in place with your MMBB financial planner that you can share with your beneficiaries. Hearing firsthand how planning benefited you may spur your loved one to establish their own plan.
4. Legal and Tax Considerations
Inheritances can come in different forms and have different tax implications. On the other hand, trusts may have specific criteria that need to be met to access the funds. For example, the beneficiary may have to reach a certain age or use the funds for specific reasons. Life insurance has different tax implications than inheriting a portfolio of stocks and bonds and inheriting a house is different than inheriting cash.
You’ll want to talk to your beneficiaries about these differences and include a tax professional in the discussion if necessary. A tax advisor can help to simplify the process by demystifying tax law. In addition, an estate attorney can help make sense of any property or trust questions.
5. Emotional Preparedness
Emotionally preparing your beneficiaries for their inheritance is a discussion that can only happen between you and your loved ones. You will want to talk about the handing down of the family home or any possession now so when the time comes, your beneficiaries can work through their grief and still execute what needs to be done with their inheritance.
Thinking and talking about life after we are gone is not easy. However, by taking these steps you can help ensure that your beneficiaries manage their inheritance wisely and responsibly.
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Translations of any materials into languages other than English are intended solely as a convenience to the non-English-reading public. We have attempted to provide an accurate translation of the original material in English, but due to the nuances in translating to a foreign language, slight differences may exist.
Las traducciones de cualquier material a idiomas que no sean el inglés son para la conveniencia de aquellos que no leen inglés. Hemos intentado proporcionar una traducción precisa del material original en inglés, pero debido a las diferencias de la traducción a un idioma extranjero, pueden existir ligeras diferencias.
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