No one wants to talk about death. But I’ve been thinking about it since I heard Boston estate planning attorney Patricia Annino say at a Women’s Philanthropy Institute webinar that many boomer women can look forward to two or more inheritances.
One may come from their husbands, who'll likely predecease them; women live roughly four years longer than men, on average. Another bequest could be the gift of parents or in-laws. Money or assets might even be passed along by siblings; my 50-something sister is named in my will and, since I don’t have children, will get my horse even if my husband is still alive.
Are you prepared for the possibility of multiple inheritances?
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Overall, 2 out of 3 boomer households will get at least one inheritance in their lifetimes, receiving a median of $64,000, according to estimates by the Center for Retirement Research at Boston College. The wealthiest 10 percent are expected to get an average of nearly $1.5 million.
What Could Reduce Inheritances
Those numbers may be a little pie-in-the-sky, of course.
Most boomers haven’t received any inheritances yet. And as a recent Wall Street Journal article noted, since the postwar generation is living longer and many took a big financial hit in 2008: “Many baby boomers are likely to get less money from mom and dad than they thought. The worse news: They may have to help their parents financially instead.”
If you will be receiving one or more inheritances and plan properly, though, the windfall can change your life. I speak from experience. My husband and I received two parental inheritances in the past four years. But I’d be lying if I said that navigating those transactions was a breeze or that we didn’t make a few mistakes along the way.
Having the Delicate Talk
To avoid being flummoxed by a potential inheritance, try to talk with your parents about their estate plans. This conversation can be delicate, but if your parents are OK with discussing the subject, do it. They might even want start to the ball rolling by passing down some belongings before they die.
Our family helped my father gradually distribute many of his possessions during his battle with Alzheimer’s. Each of the kids selected items that my mom didn’t want to keep, like clocks and artwork.
By law, your parents can give away up to $13,000 a year to as many individuals as they’d like like without incurring the federal gift tax. The $13,000 figure includes the value of cash, stocks, jewelry, artwork, antiques and more.
How to Prepare for Inheritances
Even the best advance planning doesn’t guarantee that you won’t feel slammed with decisions once you receive an inheritance. To make the situation less fearful, here’s what I recommend you do when the time comes:
Cool your heels. Don’t make any rash investment decisions. Try to take time to focus on how to use the money to achieve your goals. Park the cash temporarily in a money-market account, short-term CDs or high-quality mutual funds until you decide the best way to invest it.
Hire a financial pro. A financial planner or adviser can help you understand your options and any tax or estate planning implications so you can come up with an appropriate plan. If you inherit a family business or a home with your siblings as co-inheritors, this type of unbiased help can be indispensable.
The money pro can also work with you to make sure the inheritance improves your household’s balance sheet. It may be that the found money will let you purchase adequate insurance, finance your eventual retirement, reduce debts or build an emergency savings fund.
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Update your estate plan. This way, you’ll know exactly what will happen to your inheritance if you die tomorrow. At the very least, you’ll want to have an up-to-date will.
If you don’t have an estate-planning attorney, you can start looking for one at the websites of the American College of Trust And Estate Counsel and the National Association of Estate Planners and Councils. Expect to pay $500 or more to get a will drawn up.
Keep the inheritance money in a separate, not joint, account. In most states, an inheritance is the sole property of the spouse who received it — so long as the heir holds it alone. So talk with an estate-planning attorney before putting the money in a joint account with your spouse or partner or using it to, say, put an addition on a jointly owned home.
Keeping the money separate also lets you shield it from your spouse's creditors, which could be important if he or she has debt troubles.
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Follow the IRA rules to the letter. Inheriting an IRA can be tricky and fraught with tax consequences.
You must decide whether to take the IRA as a lump sum or recast it as an inherited IRA. The latter is generally better, since you’ll reduce your tax hit.
Work with the IRA’s financial institution to retitle the account so you’ll avoid paying income tax on all the assets immediately. That means you must keep the original owner's name on the account but amend the title to show that you inherited it. For example, the IRA might now say: Mr. Smith, deceased, inherited IRA for the benefit of Ms. Smith, beneficiary.
When moving the IRA money from the deceased’s financial institution to yours, request a "trustee-to-trustee" transfer. If you instead combine an inherited IRA with your own, that could create tax headaches for you.
If the IRA was owned by someone 70½ or older, you’ll also need to check whether the account owner took the minimum required annual distribution in the year of death. If not, the beneficiary must withdraw the owner's last required distribution before transferring the assets.
Roll over an inherited 401(k). In general, a 401(k) beneficiary who isn’t a spouse will be told to take the money as a lump sum, typically within a year. But you can instead roll over the money into an inherited IRA. Then you can split the cash into separate parts, one for every named beneficiary. Each of you can then stretch out annual distributions over your life expectancies, for tax purposes.
Consult an appraiser for non-monetary assets. If you are clueless about the value of that Sir Alfred J. Munnings’ horse painting, Chippendale table or diamond ring you inherited, pay an hourly fee to a reputable appraiser of “household contents” or “decorative arts.” Ask for recommendations at local auction houses and antique stores. You can also look for an appraiser at the website of the American Society of Appraisers or the International Society of Appraisers.
Now sit back and dream a little. Remember that simple house in the mountains you’ve been yearning for?
Dad would have loved it.