One of the most important components of estate planning is working through who will inherit your assets. It’s a difficult decision. Who can you trust to preserve family wealth? Who needs the most? Who’s most aligned with the family’s values?
While they’re important questions, perhaps the most critical one is, “Who’s ready to receive an inheritance?” While it may seem a nonsensical question – who would say they’re not ready to receive money? – it’s not uncommon for inheritors to struggle with newfound wealth.
The concept is the basis for the oft-repeated proverb, “shirtsleeves to shirtsleeves in three generations,” referencing the difficulty in maintaining family wealth from the generation that earns it through the subsequent generations that inherit it.
“While the saying itself is hyperbole, there is truth that families can struggle to sustain wealth across generations,” said Judy Raffa, head of Strategic Advisory Solutions for PNC Private Bank. “Inheriting wealth isn’t just a luxury. It’s a responsibility that for some, comes with a lot of pressure and uncertainty.”
There are steps you can take to alleviate the uncertainty, though, and help your heirs prepare for what they’ll inherit.
1. Talk About the Family Wealth
Communication may be the most overlooked but important aspect of family wealth planning. Many heirs may not be fully aware of the family’s financial situation or that they are set to inherit significant assets. Having discussions about wealth can also be difficult both for parents and their future heirs. It may be uncomfortable for parents to talk about the full scope of the family’s wealth and difficult for heirs to think about the responsibility of managing money without their parents.
Still, the more transparent you can be —and the more involved heirs can be in the family’s estate planning process, financial decision-making, and formation of the family mission —can make a significant difference in comfort and readiness later on. Frank conversations about family wealth can identify gaps in understanding and education that can be adjusted before a significant inheritance is passed on. Additionally, involving future heirs in conversations with family financial and tax advisors, when appropriate, can help to build comfort in seeking future guidance from those trusted relationships.
2. Discuss Family Values and Expectations
A common source of confusion or fear for older generations is that passing along significant wealth will disincentivize hard work among heirs or that money will be used in ways not consistent with the family value system. That can stem from lack of clear direction or expectation that you leave with your heirs. It’s compounded by the fact that once you pass on wealth, it’s much harder to influence how it’s used.
Once again, communication is key to ensuring that inherited wealth is put to its intended purpose – if there is one. Is higher education a goal for your family? Is there an expectation that your heirs will continue working or find success as an entrepreneur? Perhaps charitable giving is an important part of the family legacy. Whatever the expectation is for your family wealth, it’s important to be transparent about your wishes.
“It may seem heavy-handed to give a gift and prescribe how it’s to be used, but that direction can be a tremendous comfort both to the benefactor and an heir,” Raffa said. “Being clear about the expectations around family legacy and values can help heirs make better decisions with inherited wealth.”
3. Be Honest about the “Who” and “What”
One of the primary benefits of a comprehensive estate plan is the clear direction it provides as to how and to whom assets are distributed. But clear direction for the legal and financial systems may not translate to heirs – especially if details of the inheritance are withheld until your death.
Although we often think of inheritance as an equal distribution of wealth or other assets, it is often not the case that all heirs inherit equally. Individual need, readiness to inherit, age, or other unique factors — such as involvement in a family business, for example — can drive asset distribution decisions that gift more to one heir than they do another, which can lead to family conflict and even legal contention. Prepare your heirs for what they can plan to inherit and any appropriate detail around your decision-making before you gift your wealth. That can allow heirs to ask questions and can help you to mitigate conflict, and – if necessary – adjust your estate plan.
4. Give Efficiently
Think through the specific needs your heirs have, or your own expectations for how the inheritance will be used when determining how you pass down wealth. Certain assets can be hard to access, add tax burden, or can bump an inheritor into a higher tax bracket entirely.
If your heirs need convenient access to money, assets like cash, money market accounts or taxable brokerage accounts may be a wise choice, because of their liquidity. Assets like stock can confer tax advantages due the stepped up basis it receives when it is passed down – essentially allowing heirs to reset the clock on capital gains. Still other assets, such as 401(k) accounts or life insurance policies that have designated beneficiaries can be passed down without going through the probate process, helping heirs to access their inheritance more efficiently and privately.
Whatever the specific financial needs of your heirs, an advisor can help you determine how to structure your estate plan to meet them.
5. Consider a Trust
Much of the work in preparing heirs to inherit revolves around frank conversation, transparency, and education, but establishing a trust is a tactical step you can take to help heirs receive and manage their inheritance consistent with your wishes. A trust can include specific conditions for how and when heirs can access their inheritance or stipulate how inheritance funds are to be used. Trusts also have tax and administrative advantages that can ease the burden on heirs, avoid probate, and protect privacy during the asset distribution process.
Trusts are also flexible to life’s changing circumstances, allowing you to amend one as family priorities evolve or beneficiaries change.
“Trusts can be a very effective part of your estate plan,” Raffa said. “They help to begin the transfer of wealth to the next generation during your lifetime, while also helping to protect your wishes and legacy after death.”
While receiving an inheritance may provide financial security, it can come with pressure and uncertainty, especially if heirs are unprepared to receive it. Talking to your advisor can help assess the readiness of potential heirs and any potential gaps as you establish your estate plan.
