Knowing what to do when funds fall to you
NEW YORK — Mark Danner, who lives on Long Island just outside New York, expects to receive a "fairly significant" inheritance from a distant relative within the next year or so.
Mr. Danner (that's not his real name) has already hired an attorney to make certain the transaction clears the probate system expeditiously. Still, he's not sure how much money he will get, or how he will use it.
Welcome to the world of inheritances.
During the next 10 to 20 years, one of the largest mass transfers of wealth in global financial history is expected to occur. Between $5 trillion and $10 trillion dollars will be passed down in the United States, primarily from parents who amassed considerable savings in the affluent post-World War II era.
With Americans living longer, these transfers will often involve a set of elderly parents, perhaps in their 80s or 90s, and a set of children, often in their 60s or 70s.
At the same time, older parents face costly challenges that threaten the assets they plan to leave behind. These include potentially large expenses for elder care, outlays for complicated hospital procedures, and big tax bites.
The upshot: Knowing what a person will inherit often involves a large degree of approximation. Because of that, say financial experts, it is important to devise a comprehensive family plan for inheritances as early as possible.
Even before the benefactors pass on, families must seek to minimize estate taxes, says David Bendix, president of Bendix Financial Group in Uniondale, N.Y.
At present, after use of a $650,000 exemption per individual, the federal tax rate on an individual's estate is 37 percent. Once assets top $3 million, the rate jumps to 55 percent, according to the Policy and Taxation Group, in Santa Ana, Calif. The group seeks to end federal taxation of inheritances.
"What I've learned from experience is that many people who inherit money are shocked to find out that if they had handled the transfer properly they could have escaped massive amounts of taxes and inherited twice as much as they did," says Mr. Bendix. "Pre-mortum planning," he says "is step one in putting together an inheritance plan."
One hurdle, however, is that many older parents are reluctant to discuss their financial holdings. Yet, says Bendix, heirs need to know what is held - and in what types of assets, such as stocks, bonds, or real estate. By doing so, some elder children (the second generation) might find it financially advantageous to actually "disclaim an inheritance," says Bendix, and let it pass directly to the next generation.
Besides knowing what they own, donors must also decide where they want their estates to go. The establishment of trusts or wills, therefore, is necessary "to ensure a proper distribution of assets," says Lewis Altfest, president of L.J. Altfest & Co., a financial-services firm here. If you fail to do this, he warns, a probate court could direct it for you and in ways in which you might not be happy.
"Trusts are especially important in the case of husbands and wives," says Mr. Altfest. "You have, for example, certain tax exemptions that you can take. You either use them or lose them. You do not want to be one of those people who lose them," he says.
If you expect to come into money, Bendix recommends you "establish clear objectives about the use of your inheritance." That will be determined by your age and your family/financial situation. You may wish to pay off your debts first, then set aside monies for your retirement or for your children.
Don't be timid about "spending a little of the inheritance on yourself," at the outset, Mr. Bendix says. "Get it out of your system," perhaps by buying a car or doing some work on the house. Then set the rest of the assets in liquid investments that you can redirect. You might initially put funds in a bank certificate of deposit, a money-market fund, US Treasury bills, or a floating-rate bond fund.
Later, as your goals become clearer, you would want to shift assets to long-range investment options such as growth stocks and index funds, Bendix says.
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