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HomeFinanceHow To Plan For An Anticipated Inheritance In 9 Steps

How To Plan For An Anticipated Inheritance In 9 Steps


One of the biggest wealth transfers in history is about to unfold.

That is, it’s estimated that more than $68 trillion in wealth – involving 45 million households across the U.S. – will be transferred through inheritance in the next 25 years.

Will you be one of them?

If you’re a Millennial or a Gen Zer, chances are you may be in the group of Americans most likely to benefit from this massive transfer.

If so, you’ll need to know how to plan for an anticipated inheritance, even if you’re not sure of the details.

1. Have a rough idea of the amount that you are set to inherit

How To Plan For An Anticipated Inheritance In 9 Steps - 1. Have a rough idea of the amount that you are set to inherit

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Though this seems like a simple step, it often isn’t.

Not all parents or grandparents are open about their personal net worth (it’s a generational thing). And asking how much you can expect to inherit – or, if you’ll be inheriting anything at all – can seem presumptuous at best, and greedy at worst. 

Some parents and grandparents will be open to this question. Some may even provide the information without you asking. But if that’s not your situation, you’ll need to proceed carefully and delicately. 

How do I find out how much I will inherit?

You probably already have an idea of your parents’ approximate net worth, but if you don’t, don’t beat yourself up. After all, it isn’t always that obvious on the surface.

The best way to find out?

Just ask.

If your parents aren’t forthcoming about their finances, you’ll need to step back. That doesn’t mean giving up, however. You can let some time pass, then approach the subject later. Just be sure to frame it in such a way that you’re interested in protecting all they’ve worked so hard to accumulate.

2. Learn what makes up the inheritance

Some estates are very simple, while others can be incredibly complicated. The best scenario is a parent who rents his or her home (no house to sell) and has nearly all wealth sitting in financial assets, like bank and brokerage accounts.

Things get way more complicated when a large share of the estate is held in real estate, and especially investment real estate. More complicated still is business equity.

Collectibles, like jewelry and artwork, can also be problematic. You’ll first need to get a ballpark estimate of the value. But before they can be sold, they may need to be formally appraised. 

Just as important, your parents may prefer to pass real estate, business interests, or collectibles to specific individuals. That may or may not include you, which is something you need to know before you plan to inherit them.

3. Know if there are other beneficiaries

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This is as delicate an issue as requesting the value of your parents’ estate. If you are the sole beneficiary, it’s a non-problem. But if there are siblings, or others your parents may want to distribute assets to, the waters can get a bit muddy.

In a perfect world, your parents will set up an equal distribution for you and your siblings. But real life isn’t always so simple. 

For reasons known or unknown to you, your parents may choose unequal distributions. This can be due to family politics, like one sibling being favored over the others, or one sibling being closer to your parents than others. In some situations, parents may choose to give a larger share to a child who provides for their direct care in their later years. 

There may still be other situations where your parents want to make special provisions for one of your siblings or even a grandchild.

Yes, it can get worse!

But those aren’t even the most complicated beneficiary situations.

Given that divorce is common, and often involves a second set of children, there may be issues and limitations. 

In some extreme situations, parents may disown one or more children, and exclude them from the inheritance. If that might be you, you’ll need to know.

Finally, complicated family situations can result in probate. That’s where the estate has to go before a judge prior to distribution. This can happen because of the nature of the family situation, or because one or more potential beneficiaries (or even an excluded party) challenge the distribution of the estate proceeds.

If that situation seems likely, it’s one that should be discussed with your parents. They may need to set up a trust to ensure each beneficiary gets the intended distribution so the estate can avoid probate.

4. Understand the intended distribution process 

This primarily has to do with the timing of inheritance distributions. While the conventional distribution method is to distribute all beneficiary shares on a common date when the estate is settled, that’s not always the case.

Parents sometimes arrange to have estate assets distributed gradually.

For example: if one or more beneficiaries is considered to be irresponsible with money, the parents may set up a staggered distribution over a period of several years. 

A staggered distribution is often accomplished through a trust. If your parents have set up a trust, either for part or all of the estate, you’ll need to know of its existence, as well as the intended distribution.

Some trusts are even more specific

For example, they may include provisions that will distribute funds based on certain milestones. Common examples include holding distributions until the beneficiary turns 30 (or some other age), or gets married (or divorced, if the marriage is shaky).

Trusts can be amazingly specific, which is why people set them up. That’s also why you’ll need to know any distribution method that will be used. 

Some estates may also have provisions to make staggered distributions based on asset types.

For example: cash-type assets may be distributed early in the estate process. But real estate and business interests may not be distributed until they have been liquidated. 

5. Estimate your personal finances at the anticipated time the inheritance happen

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A big part of how you handle an inheritance will be determined by your own financial situation.

If you already have a sizable personal estate, you may be able to simply fold the inheritance into your existing plan. But if your finances are limited, you may need to be more intentional and figure out what you’re going to do with the inheritance when it arrives (ya know, so you don’t blow it all on a bright red Mustang). 

The point is, only when you have a clear picture of your own finances can you make the best use of an inheritance. And to get the greatest benefit, it can help to improve your finances before you receive the money. The better positioned you will be when the inheritance comes in, the more flexibility you’ll have in choosing where to allocate the money. 

If you’ve not been investing up to this point, you may want to begin before the inheritance comes in. It’s best to get investment experience with a small amount of money, so you don’t risk losing your windfall through poor investment choices.

Read more: Best Investment Accounts For Young Investors

6. Design a plan (aka what to do with the inheritance)

If you already have your own personal financial plan, planning for an inheritance will be much easier. But even if you do, you should have at least a loose plan for what to do with the new money. The worst choice is holding off until the inheritance is received. Without a solid plan, you may quickly draw down the new money, financing a series of wants.

Having a plan for the inheritance will ensure the money will provide for a better future. To learn how to set up a financial plan, check out our article: What Is A Financial Plan And Why Do You Need One?

Decide what your priorities are

The main purpose of a plan is to set up a series of priorities.

For example: if your retirement planning isn’t where you want to be, you can make it a priority to fix that with the inheritance. You can either use the new money to enable you to make larger retirement plan contributions or plan to set up an annuity specifically for retirement.

Take advantage of annuities

One of the advantages of annuities is that they can be used to shore up an adequate retirement plan.

Read moreWhat Is An Annuity And Should You Consider One?

The investment earnings on annuities accumulate on a tax-deferred basis, like retirement plans. But the major advantage is that there are no limits to your contributions. You can make a single, large lump sum contribution to an annuity and let it grow tax-free until retirement. You can set a date that distributions will begin, which can even cover the rest of your life.

In addition, Dr. Guy Baker, CFP and founder of Wealth Teams Alliance, also points out:

“Annuities are a fixed-income alternative. The opportunity to get a market return with no downside risk can be dramatically better than the income from an investment-grade bond of comparable risk. The amount to put into an annuity should coordinate with the age of the beneficiary and the investment objectives. In general, an indexed annuity can provide significant benefits for no additional risk.”

However, since annuities are complicated instruments themselves, you’ll need time to do research and evaluate the best one to take. That’s best done in advance of receiving an inheritance.

Consider starting your own business

In a different direction, maybe you’ve been dreaming of starting your own business. If you lack the capital to do that up to this point, the inheritance can make it happen.

In the meantime, you can make preliminary plans for the business, and even get it up and running as a side hustle. When the inheritance arrives, you’ll have an established business to grow, rather than starting a new one from the ground up.

Starting a business is always risky, though, so make sure you carefully consider such a big move if/when you do receive an inheritance.

Read more: How To Start Your Own Business – A Complete Step-By-Step Guide

7. Find out if there will be tax consequences

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You’ve undoubtedly heard the saying,

“the only things certain in life are death and taxes.”

Well, guess what? Sometimes the two happen at the same time. 

Officially, they’re called inheritance taxes. Because estates can contain a lot of money, governments view them as rich revenue sources. Just like they tax your income, your home, your utility bills, and even your purchases, there are taxes designed to snatch a part of an inheritance before you receive it. 

There’s good news and bad news here.

Let’s start with the good news…

There is a federal inheritance tax, but the good news is that it only applies to very large estates. 

Under current IRS regulations, estates that transfer from one spouse to another are generally tax exempt. But even when they pass to other beneficiaries, like children and grandchildren, there’s a federal estate tax exemption of $11.7 million, for 2021. 

That means if the total value of the estate (before distribution) doesn’t exceed $11.7 million, there’ll be no federal tax on the inheritance.

Now for the bad news…

18 states impose some type of state-level inheritance tax. And while some of those states match the federal estate exemption, there are no fewer than 13 with lower exemptions.

On the low-end, Massachusetts and Oregon can tax estates as low as $1 million. Rhode Island sets the threshold at $1,595,156.

Not many Americans have a net worth of over $11.7 million. But there are many millions with estates of $1 million or more. Even if you’re not affected by the federal estate tax, you may be subject to it at the state level.

If any of the estate tax thresholds may apply in your situation, whether at the state or federal level, you’ll need to be prepared for this outcome. 

So make sure you estimate for a lower inheritance

The best strategy is to estimate a lower inheritance, based on applicable estate tax rates. Fortunately, the estate will pay the inheritance tax before the money is distributed. But you still need to be prepared for a lower distribution amount.

If your parents are open about your inheritance, you may even be able to discuss the tax consequences with them. That way they’ll be in a position to take action to minimize them before the fact.

8. Decide if you’ll need a financial planner

If you believe your net worth is too small to justify a financial planner right now, you may change your mind when you receive a large inheritance. But you don’t have to wait until the inheritance arrives to at least consult a financial planner. 

If you know the approximate size of your inheritance, paying for a meeting with a financial planner may be money well spent. The financial planner can help you to make decisions to both set up your current finances in anticipation of the inheritance, as well as to make intelligent decisions when it actually comes. 

The financial planner may also provide ideas you may want to convey to your parents. They’re often unaware of strategies that will minimize inheritance taxes, or create a strategic plan for a more successful distribution of the estate.

In addition, if there may be questions surrounding the estate, perhaps involving the children of a previous or subsequent marriage, the financial planner may recommend consulting with an estate attorney.

The more you can do in advance, the less likely it is you’ll be blindsided when the inheritance arrives and the stakes are higher.

Read more: Are Certified Financial Planners Worth The Money?

9. Decide if you’ll need a trust

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If you don’t have one now, receiving a large inheritance might make a trust advisable. It may even be completely necessary if the inheritance is particularly large, or if you yourself have children from a previous marriage.

A trust is a way to protect your assets, and to ensure the money is distributed as you wish upon your death. 

Shawn Plummer, CEO of The Annuity Expert, explains further:

“You may need a trust if you want to specify how your assets will be distributed without a probate court getting involved. While a will can achieve a similar purpose, wills have to be authenticated by a probate court and can require more time and money.”

Just as important, a trust has the potential to protect your assets from seizure by creditors, or from litigation. With the larger personal estate the inheritance will create, you may need just that kind of protection. 

And don’t worry, you won’t need to pay an arm and a leg to get these documents drawn up. Trust & Will offers estate planning help with plans starting at just $39. This can help you avoid racking up a high bill with an estate planner.

Summary

You’ve probably known of situations where someone came into a large windfall, only to be broke a few short years later. Unfortunately, it’s not an uncommon outcome.

The sudden arrival of a large amount of money can cause an unprepared recipient to blow what could be a life-changing opportunity. It could have the potential to dramatically improve your finances and your life.

You’ll need a plan to make that happen, and it’s never too early to start drawing one up.

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