Why Discussing Your Inheritance Is Crucial in Financial Planning

How to Discuss Your Inheritance With Family

Money can be a touchy subject within families, and one many would prefer to avoid. A study from the Boston College Center on Wealth and Philanthropy projects that $59 trillion is expected to be passed down to heirs, charities, and taxes between 2007 and 2061. The study said heirs will receive $36 trillion over that period, while federal estate taxes will receive $5.6 trillion. These statistics alone suggest that conversations around family wealth, personal responsibilities, and family expectations regarding this wealth, are necessary — especially when it comes to an individual’s long-term financial planning.

Two closely tied family financial topics that warrant discussion are inheritance and gifts. An inheritance is money or property passed to an heir after the original owner has died, whereas a gift is passed along during the giver’s lifetime. With a gift, the giver (not the receiver) is responsible for reporting it on their taxes, but only if the gift’s value exceeds the IRS’s gift limits, currently $14,000 in 2015. Taxes on an inheritance are a more complicated issue. Both inheritance and gifts are common strategies for passing on wealth within families, and both are particularly integral to a gift and estate beneficiary individual’s financial planning.

Starting an inheritance conversation may seem uncomfortable, but the best way is to approach it in a straightforward manner. For example, you might want to say, “I’m starting to do my own financial planning, and part of this includes having some idea of my expected income and assets for retirement. It would be really useful for me to be able to talk with you about your plans for your wealth. I’m not saying this with any expectation or entitlement, but rather just to open the conversation.”

Once the conversation has begun, you can start to ask such basic questions as:

  1. Once financial gifts have begun, will they continue on on a regular basis?
  2. Can financial gifts be relied upon as part of my annual cash flow?
  3. What would cause a discontinuation or disruption of recurring gifts?
  4. What is the potential value of my inheritance?
  5. When will my inheritance be received? Over time or in one lump sum?
  6. How will the family inheritance be divided amongst children and grandchildren?
  7. Will my inheritance be received as a lump sum, or in installments?
  8. How will the transfer of assets be handled?

Although this is not an exhaustive list, knowing the answers to these questions can help you make better choices between long-term and short-term savings goals, and even choose a career path more wisely. If you have an inheritance that will enable you to live comfortably in retirement, you may decide to allocate fewer funds to that long-term account, choose to retire earlier, or pursue a career passion that is less lucrative but more personally rewarding.

As with any conversation between different generations, though, there is potential for miscommunication and misunderstanding, which can lead to charged emotions. To guide this conversation in a rational direction, aim for it to be inclusive, factual, open-minded, and inviting. Plan to have this discussion in a neutral, comfortable place, and at a time that is relatively tension- and distraction-free.

Projecting a sense of confidence, confidentiality, and organization regarding your planning will go a long way to set minds at ease and impart a willingness to share details. Come prepared with an agenda that is shared with all participants, and set a realistic end time. This conversation will be part of an ongoing process, so don’t feel the pressure to hash out each question or issue in one meeting. Since estate planning can be complex, you may also need to ask permission to discuss some details with your family’s trusted advisors.

Gathering accurate and detailed information will help you develop a clear financial plan with confidence. In my experience, it ultimately leads to better estate and financial plans, more trust, and stronger relationships.

Looking for financial and investment advice from a trusted advisor? Loretta Hutchinson CFP®, CDFA™, NCC is a Certified Financial Planner™ and President of InSync Financial Group and Financial Divorce Plan, LLC in Yardley, PA and Naples, FL. She can be reached at [email protected] or 215-302-3437

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Loretta Hutchinson is a member of the DailyWorth Connect Program. Read more about the program here.

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