Putting a house in trust is a way to ensure that your home legally transfers to the beneficiary of your choice when you die. This estate planning option helps avoid probate, as well as helping to keep your affairs private.
Why put a house in trust?
A trust is a fiduciary agreement, which means it protects and serves the interests of someone else
Cornell University Legal Information Institute. Trust. Accessed Dec 18, 2023.
. Putting your house in trust helps ensure that ownership of your house will pass smoothly and quickly to the person(s) you choose after you die.
A trust accomplishes this smooth transfer of ownership in three main ways:
Trusts don’t have to go through probate. Probate is a court process during which a judge determines the validity of a deceased person’s will and oversees the distribution of their assets. Probate can be a long, expensive and involved process, which can delay beneficiaries from taking possession of assets you want them to have. When you put your home in trust, your trustee can likely skip probate and your beneficiary can take possession of the house faster, without the probate court getting involved.
Trusts can help keep your affairs private. Unlike wills that are subject to probate, trusts aren’t public record. This can help avoid family disputes, hurt feelings, squabbles and challenges to your wishes — as well as keep your family business out of public view
.
Trusts can help make your trustee’s job easier. Not having to navigate a complex probate process simplifies your trustee’s responsibilities and makes their life easier — especially at a time when your trustee may be grieving your loss.
🤓Nerdy Tip
Putting your house in trust could have significant tax implications, depending on the type of trust you set up and your situation. Consult with an estate planning attorney before placing your home in a trust.
How to put your house in a trust
While specific trust laws vary from state to state, putting a house in trust involves these three basic steps:
Choose your trustee(s) and beneficiaries. Consider naming backups in case your trustees or beneficiaries die before you do.
Create the trust document. Make sure it has all the required signatures/notarizations for your state. You can do this by working with an attorney or using an online service. If you have multiple beneficiaries, be clear about who gets the house.
Get copies. Give your trustee a copy of the most up-to-date version of your trust.
Fund the trust. You’ll likely need to transfer ownership of your home to the trust by creating a new deed for your property that gives full ownership of the house to your trust.
Update your county’s property records by giving it a copy of the new deed showing that the trust owns your home.
Price (one-time)
One-time fee of $159 per individual or $259 for couples.
Price (one-time)
None
Price (one-time)
$89 for Basic will plan, $99 for Comprehensive will plan, $249 for Estate Plan Bundle.
Price (annual)
$19 annual membership fee.
Price (annual)
$99 to $209 per year.
Price (annual)
None
Access to attorney support
No
Access to attorney support
No
Access to attorney support
Yes
Advantages of putting a house in trust
Putting your house in trust offers a number of advantages, including:
Avoiding probate. Trust assets typically aren’t subject to probate, which can eliminate time and expense
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Speed. Your beneficiaries won’t have to wait for the probate court. Generally, they can take possession of the house sooner than they would have otherwise.
Privacy. Trust assets don’t become public record the way probated assets do.
Estate tax and creditor advantages. Placing your home in an irrevocable trust may have estate tax advantages and potentially shield the asset from creditors
.
Disadvantages of putting a house in trust
Before placing your home in trust, it’s also wise to consider these drawbacks:
Expense. Creating and maintaining a trust is typically more expensive than creating a will.
Loss of control. If you create an irrevocable trust, you typically cannot change the terms of the trust or change the beneficiaries.
Other assets may still be subject to probate. Putting your house in trust doesn’t protect assets outside of the trust from probate. If you want to avoid probate completely, you may want to move other assets into the trust as well. You may also consider getting a pour-over will or setting up payable on death accounts, transfer on death deeds or joint tenancy deeds. In addition, IRAs, 401(k)s and life insurance policies usually require account holders to name beneficiaries, and those designations typically allow the account to avoid the probate process.
A generation-skipping trust (GST) allows people to leave assets to grandchildren or other people at least 37.5 years younger. Passing assets from Generation 1 to Generation 3 avoids paying federal estate taxes twice on assets — once when passing to Generation 2 and again when passing to Generation 3.
Although GSTs may avoid estate tax, they aren’t totally tax-free. Assets passing through a generation-skipping trust may be subject to the generation-skipping transfer tax. This tax rate happens to equal the estate tax rate, which ranges from 18% to 40%
. However, the generation-skipping tax generally only applies to estates over $12.92 million in 2023 or $13.61 million in 2024. That number is set to fall to $5 million after 2025.
Price (one-time)
None
Price (one-time)
One-time fee of $159 per individual or $259 for couples.
Price (one-time)
$89 for Basic will plan, $99 for Comprehensive will plan, $249 for Estate Plan Bundle.
Price (annual)
$99 to $209 per year.
Price (annual)
$19 annual membership fee.
Price (annual)
None
Access to attorney support
No
Access to attorney support
No
Access to attorney support
Yes
Who are GSTs good for?
Generation-skipping trusts are best for higher net worth families that want to minimize taxes on their estate, says Diedre Braverman, managing attorney with Braverman Law Group in Boulder, Colorado. People who don’t have a will or estate plan may end up leaving their heirs with taxes that they could have avoided, she adds.
Pros and cons of GSTs
When considering if a GST works best for you, think of the following.
Advantages
When set up properly, a GST may save money in taxes that Generation 2 may have had to pay had they received the assets first. This allows people to leave assets to grandchildren, nieces, nephews, grandnieces, grandnephews, or a younger spouse without having a lot of it swallowed up by taxes, Braverman says.
Trusts may be able to shield assets from lawsuits, bankruptcy and divorce settlements.
Setting up a GST gets you thinking about your legacy. “It may get you into estate planning in general,” Braverman says, “which is a good thing for everybody.”
Disadvantages
Attorney fees associated with setting up a GST vary greatly across the country and can be hefty.
Money in the trust can only be withdrawn for living expenses. While those amounts can be generous, it still has to have some relationship correlated to the beneficiaries’ standard of living, Braverman says.
Trusts require a trustee, which is an ongoing expense.
The generation that gets skipped may have objections. “Generation 2 can typically get income from the trust, but they don’t have ownership in the trust,” says Brian Hill, a partner at Ball Morse Lowe in Norman, Oklahoma. “They can’t sell the asset and go buy a bigger personal home. Because of that, there could be tension.”
How to set up a GST
Work with an estate planning attorney to set up your GST. Some things to keep in mind:
Go slow. Setting up a GST involves at least three generations of people, so it’s essential to think through the process. “This is in place for a long time,” Hill says.
Talk to various advisors. Speaking with different people helps you think through all the different what-ifs, Hill says. Consider including tax professionals, financial planners and even other family members in your conversations.
Keep your appointment. People tend to cancel their appointments when they don’t have all the answers to questions that a lawyer may have sent them before their first meeting, Braverman says. This is a mistake. Working with a good attorney will help you get the answers you need.
Think about what you want your trust to encourage or discourage. Lawyers can put all kinds of provisions in trusts, Braverman says. Stipulations on substance abuse or GPAs or beneficiaries being self-supporting, for example, can help express the client’s overall intent.
GST mistakes to avoid
People often make two common mistakes, according to Braverman.
Naming family members as trustees. Money creates suspicions, and the trustee has a lot of power, she says. This can build resentment and cause problems.
Not considering who will be trustee if your original trustee passes. Consult with your attorney about who will take over if your original trustee can no longer handle the role. Braverman suggests three options for these successor trustees: Trust departments in large financial institutions, trust companies or professional, private fiduciaries.
Frequently asked questions
Can I only leave money to family members in a GST?
No. Money in a GST can go to grandchildren, grandnieces, grandnephews, or anyone who is at least 37.5 years younger than the grantor.
What is the beneficiary of a GST called?
A “skip” person is the beneficiary of a GST who is two or more generations below the settlor’s generation.
Is there a way to avoid paying the generation-skipping tax?
The IRS exclusion allows grandparents to give away $12.92 million in 2023 without paying this tax. This number is set to drop drastically after 2025 — to $5 million.
Delaware may be one of the nation’s smaller states, but it certainly packs a punch in character and opportunity. From its strategic location on the East Coast and tax-friendly policies, to its vibrant communities and natural beauty, there is much to appreciate about life in the First State. However, like any location, living in Delaware has its share of drawbacks. In this Redfin article, we will look at what it’s like to call this state home, exploring the unique pros and cons of living in Delaware. So whether you’re looking for homes for sale in Wilmington, apartments in Dover, or just want to learn more about the area, join us as we embark on a journey through the First State.
Pros of living in Delaware
1. No sales tax and other great tax benefits
One of the standout advantages of living in Delaware is the absence of a state sales tax. This unique feature sets Delaware apart from many other states in the U.S. Residents of the “First State” can enjoy tax-free shopping, making their dollars stretch further and saving significantly on everyday purchases, big-ticket items, and even luxury goods. Additionally, the state does not tax Social Security income, and no inheritance or estate tax exists. These favorable tax policies contribute to a lower overall tax burden for individuals and families, offering an attractive financial incentive for those who appreciate keeping more of their hard-earned income.
2. Proximity to major East Coast cities
Delaware’s prime location on the East Coast offers a significant advantage to its residents. Positioned between the bustling urban centers of New York City and Washington, D.C., Delaware provides quick and convenient access to these metropolitan hubs’ cultural, economic, and professional opportunities. The state’s well-connected transportation infrastructure, including I-95 and Amtrak, makes commuting or weekend getaways a breeze. This geographic advantage allows Delawareans to enjoy the benefits of living in a more relaxed and affordable environment, while still having the vast array of amenities and services of major cities just a short journey away.
3. Beautiful coastal areas
The state boasts a stunning stretch of coastline along the Atlantic Ocean, featuring pristine beaches such as Rehoboth, Bethany, and Dewey Beach, each with a unique character. These coastal havens offer opportunities for sunbathing, swimming, water sports, and scenic walks along the boardwalks. Additionally, Delaware’s coastal areas are home to picturesque fishing villages like Bowers and charming beach towns, each exuding a sense of nostalgia and offering delectable seafood dining options.
4. Historic charm and cultural heritage
As one of the original 13 colonies, the state boasts a rich legacy celebrated through numerous historic sites and museums. Delaware enchants residents with its rich tapestry of history, ranging from the charming colonial-era buildings in New Castle to Dover’s pivotal role in early American history. Its charming historic districts and landmarks provide a living connection to the past, while cultural festivals, arts communities, and educational institutions help foster a dynamic appreciation for heritage.
5. Sense of community
Delaware’s residents often praise the state’s strong sense of community, fostered by numerous small towns and close-knit neighborhoods. Communities frequently unite for local events, festivals, and volunteering, reinforcing neighborly bonds and nurturing a supportive, inclusive atmosphere. The state’s modest size maintains this sense of connection even in larger cities, ensuring a network of support and meaningful relationships. This pervasive sense of belonging significantly enriches residents’ quality of life, adding to Delaware’s charm and making it an inviting place to live.
Cons of living in Delaware
1. High cost of living in certain areas
While Delaware offers diverse, appealing features, including its tax benefits and coastal beauty, it’s not without drawbacks, particularly concerning the cost of living in specific areas. Sussex County, famed for its scenic coastal communities, experiences a cost of living approximately 3% higher than the national average, driven in part by the elevated demand for housing in these picturesque towns. The state’s median sale price, at $341,500, is lower than the national median of $412,001. However, the median sale price in Lewes soars to $596,000, underscoring the considerable discrepancy in real estate costs. This higher cost of living in select areas can pose financial challenges for residents, affecting housing affordability and everyday expenses but there are many affordable places to explore.
2. Limited public transportation options
One notable drawback of living in Delaware is the limited public transportation options, particularly in some less urbanized areas. While the state’s metropolitan regions offer some public transit services, like Dover, which has a transit score of 28, the coverage and frequency of these systems can be limited. This leaves residents in more rural or suburban areas reliant on personal vehicles for commuting and daily transportation. This lack of extensive public transport can lead to increased traffic congestion, higher commuting costs, and limited accessibility for those who do not own a car.
3. Extreme weather fluctuations
Delaware’s weather patterns are characterized by extreme fluctuations, which can be a considerable con for residents. The state experiences all four seasons, but their transitions can be abrupt and unpredictable. Winters can bring heavy snowfall and cold temperatures, while summers can deliver sweltering heat and high humidity. Although often pleasant, the spring and fall seasons can also be marked by sudden weather changes, including severe thunderstorms and even hurricanes in some years. These rapid shifts can challenge planning outdoor activities and dressing for the day.
4. Coastal flooding and hurricane risks
With a significant portion of the state’s population concentrated along the Atlantic coast, Delawareans are more exposed to the potential consequences of coastal flooding and hurricanes. During hurricane season, the state faces the risk of severe storms and rising sea levels, which can lead to flooding, property damage, and displacement of residents. While the state has implemented measures and emergency response plans, including potential evacuation protocols, the recurrent threat of hurricanes can be a cause for concern, impacting both homeowners and the overall quality of life.
5. Smaller job market
The number of job openings and career advancement prospects can be more limited than larger metropolitan areas. The state’s compact size also means that commuters often look beyond Delaware’s borders for job options, adding to the complexity of the employment landscape. Consequently, career growth and industry diversity can be challenging, making it more difficult for professionals in certain fields to find their desired positions within the state.
Pros and cons of living in Delaware: Bottom line
Ultimately, the decision to call Delaware home depends on individual priorities and preferences. For some, the state’s serene coastal beauty and tax benefits may outweigh the disadvantages. For others, the challenges may weigh more heavily. Ultimately, living in Delaware balances the pros and cons to create a unique and fulfilling lifestyle in the “First State.”
Enjoy complimentary access to top ideas and insights — selected by our editors.
The top five states in the ranking have an average effective real-estate tax rate of 2.17%. The average annual tax rate in these states on a $244,900 home — the median home value in the country as of 2021, the year of the most recent available data — is $5,310.
Scroll through to see which states are in the top 22 and how they compare.
Transamerica is considered to be one of the world’s leading insurance and financial services companies. The firm offers insurance and investments to more than 19 million customers worldwide.
As Transamerica’s slogan suggests, the company – and its customers – are “Tomorrow Makers.” This is because the company strives to make its customers’ tomorrows everything that they plan for.
Who is Transamerica?
Table of Contents
Transamerica is a financial services company that provides insurance, investment, and retirement products and services.
It was founded in 1904 and is headquartered in Baltimore, Maryland. Transamerica is a subsidiary of Aegon, a multinational life insurance, pensions, and asset management company based in The Hague, Netherlands.
The History of Transamerica
The company has been in the business of providing insurance and financial advice for more than 100 years and it began its operation in 1904 when Amadeo Giannini started the Bank of Italy in a converted saloon in San Francisco, California.
He strived to make financial services available to everyone of all financial classes, not just the wealthy. His business really ramped up following the 1906 San Francisco earthquake when he was able to provide loans to residents for rebuilding their properties.
Several years later, in 1928, the company merged with Bank of America, and two years after that, it acquired Occidental Life Insurance via Transamerica Corporation. In 1956, the banking and life insurance companies were separated, with the insurance component maintaining the Transamerica name. Today, customers of Transamerica have access to a wide variety of insurance and financial products and services.
The firm is licensed to provide insurance in all U.S. states, and the District of Columbia, and it has approximately $223 billion of premiums in force. Transamerica has a roughly $29.5 billion in assets under management.
Products Offered By Transamerica
Transamerica offers a variety of products to both consumers and businesses.
On the insurance side, the company provides numerous options, including the following types of coverage:
Term Life
Term life insurance offers pure death benefit protection for a specific period of time.
This is typically 10 years, 15 years, 20 years, or 30 years. Should the insured pass away during the time that a term life policy is in force, the named beneficiary will receive the stated amount of death benefit.
Because term policies do not offer any type of cash value or savings component, the premiums for this type of coverage are typically more affordable than other, “permanent,” forms of coverage.
For example, you can get a $1 million term policy for less than 20% of a permanent policy with the same face value. Term life is sometimes referred to as “temporary” life insurance coverage as it is often used for covering temporary needs such as the balance of a mortgage.
Whole Life
Whole life insurance offers death benefit protection as well as cash value build up.
The funds that are inside of the cash value grow on a tax-deferred basis, meaning that no tax is due until the time of withdrawal. The cash grows at a guaranteed rate over time.
Whole life is considered permanent coverage because as long as the premium is paid, coverage remains in force – oftentimes for the “whole” of a person’s life.
Universal Life
Universal offers a death benefit protection as well as a cash value build up. However, it provides more flexibility than whole life in that the policyholder can choose to pay higher or lower premium amounts as their financial needs change over time.
The policy value may simply increase or decrease accordingly. Like with whole policies, the cash value is allowed to grow on a tax-deferred basis.
Variable Universal Life
Variable life, provides death benefit protection and cash value.
With variable universal life, however, the cash value’s return is based on underlying investments in market-related “subaccounts.” These can allow the funds in the account to grow a great deal – provided that the market moves upward. These accounts can also be riskier in a downward moving market.
Accidental Death
This can help to ensure that their loved ones will be taken care of should the unthinkable occur. (It is important to note that this benefit will not typically pay out in the event of death that is caused by sickness or other natural causes).
Final Expense
Final expense coverage focuses on paying for a person’s funeral and related expenses.
Today, the cost of a funeral – including the burial plot, headstone, and other related expenses – can exceed $10,000. Unfortunately, many families are not able to pay these costs immediately upon the death of a loved one.
Having final expense insurance allows for a way to do that – eliminating stress on loved ones, in an already stressful and emotional time.
Key Man Life
What is key man life insurance you ask?
Key person insurance is a form of business insurance that people can overlook, but one that can make all the difference in keeping a business or firm successful in the face of losing an owner, or important team member.
In addition to life insurance, Transamerica also offers a number of other financial products, including long-term care insurance, annuities, and retirement/investment savings options for those who are planning for retirement, as well as those who are already there.
Financial Strength Ratings of Transamerica
Transamerica has been given very good ratings by the insurer rating agencies.
These ratings include the following:
A.M. Best
Moody’s Investor Services
Fitch
Standard & Poor’s
A+
A1
AA-
AA-
Is Transamerica a Legit Company?
Yes, Transamerica is a legitimate company. It is a subsidiary of Aegon, a multinational life insurance, pensions, and asset management company. Aegon is rated highly by financial rating agencies such as Standard & Poor’s, Moody’s, and Fitch Ratings.
Transamerica has been providing insurance, investment, and retirement products and services since 1904 and is regulated by state and federal government agencies.
Biggest Risks Choosing Transamerica for a Life Insurance Policy?
Choosing a life insurance policy, including one from Transamerica, comes with certain risks. Some of the biggest risks to consider include policy lapse, which occurs when you fail to pay the premium on time and could result in losing coverage.
Another risk is market risk, which refers to the performance of any investments within the policy, such as a cash value component, that can be subject to market fluctuations and result in losses.
Misrepresentation is another risk to consider, as providing incorrect information on your life insurance application could result in your policy being denied or not paying out as expected in the event of a claim.
Lastly, it’s important to make sure the life insurance policy you choose is appropriate for your needs and financial situation, as Transamerica offers a range of policies.
Advantages and Considerations
When seeking life insurance, it is important that the insurer is able to offer choice and flexibility – especially such that it meets with your specific needs. Many have the misconception that they cannot find a policy for them because of their lifestyle choices, such as one looking for life insurance for a smoker, there are options out there for you and I can help with finding the best for your needs.
Transamerica provides an extremely flexible and diverse product line up, including:
Term
Whole
Universal
Variable
Final Expense
Accidental Death
This, coupled with the company’s excellent customer support team can make for a nice mix – especially for customers who may need assistance in figuring out the details in terms of how much to purchase and what type of coverage may be best for their specific needs.
In addition, Transamerica’s policies also come with a nice assortment of riders – which can make their plans even more customizable. For example, the firm offers an estate protection rider that can help in protecting loved ones from estate tax obligations that may arise from the payment of the policy’s own death benefit.
The company’s website provides additional information on both policies and policy riders so that interested potential applicants can obtain more information on how these may work in their specific scenario.
Yet, even with all of the good, there are some considerations that should be taken into account when searching for coverage – especially when doing so through just one single insurer. This is especially the case if you have certain health issues, such as searching for best life insurance rates for smokers and/or you possess other factors that may deem you as being a higher risk applicant. This may lead you to need to look into a company that offers no medical exam life insurance policies.
In these cases – or in any case – it is always good to do some comparison shopping. Otherwise, you are essentially “locked in” to whatever price the insurer presents you with. This can be somewhat similar to only going to one car dealer or one computer dealer when shopping for these items, and never even checking prices elsewhere before moving forward with your ultimate purchase. With this in mind, regardless of how good the product, it always makes good sense to shop around first.
How and Where to Get the Best Life Insurance Coverage for Your Needs
When you’re in the process of searching for the best life insurance coverage – regardless of your current health condition or status – it is important that you compare the type of policies that are available to you, as well as the premium cost from different carriers.
This is because there could be a significant variation between one insurer and another – even for the very same type and amount of coverage.
Transamerica is a financial services company that provides insurance, investment, and retirement products and services. It has a long history, having been established in 1904, and is a subsidiary of Aegon, a multinational life insurance, pensions, and asset management company.
One of the strengths of Transamerica is its broad range of products and services, which includes life insurance, annuities, mutual funds, and retirement plans. This allows customers to choose from a variety of options to meet their financial goals and needs. The company has a strong online presence, offering convenient access to account information and resources, as well as easy policy management and premium payment options.
Cost and Fees
Customer Service
User Experience
Overall
3.8
Pros
Wide range of life insurance products: Transamerica offers a variety of life insurance products, including term life, whole life, and universal life insurance, which allows customers to choose the policy that best suits their financial goals and needs.
Strong financial stability: Transamerica is a subsidiary of Aegon, a multinational life insurance, pensions, and asset management company, which has a strong financial position as indicated by its highly rated financial standing from credit rating agencies.
Convenient online services: Transamerica provides a convenient online platform for policy management, which includes access to account information, policy details, and premium payment options.
Professional support: Transamerica has a team of trained professionals who can help you understand the policy options and select the one that best suits your needs.
Cons
Potential policy lapse risk: If you fail to pay the premium on time, your life insurance policy may lapse, which can result in the loss of coverage and any accumulated cash value.
Market risk: Depending on the type of policy, there may be investment components within the policy that are subject to market risk, meaning that the policy’s value can decrease in value.
Complexity: Some of Transamerica’s life insurance products, such as universal life, can be complex and may require a higher level of understanding and management to ensure that you are making the most of your coverage.
Premium costs: The premium costs of Transamerica’s life insurance policies may be higher compared to other insurance companies, and it’s important to consider your budget when choosing a policy.
A family trust is a trust that benefits the children, grandchildren, siblings, spouse or other family members of the person establishing the trust (grantor). Family trusts are common in estate planning to ensure certain beneficiaries receive assets when the grantor dies. They can be revocable or irrevocable.
What is the main purpose of a family trust?
The main purpose of a family trust is to ensure that certain assets pass from one family member to another
American Bar Association. Family trust. Accessed Jul 10, 2023.
. Family trusts (and trusts in general) also typically avoid the probate court process, which can be expensive, public and time-consuming. Using a family trust to avoid probate can thus help ensure that beneficiaries receive their inheritances faster and with more privacy.
Family trusts can be revocable or irrevocable.
A revocable trust allows the grantor (also known as the settlor) to make changes to the trust during his or her lifetime, such as adding funds, changing which assets are in the trust or changing beneficiaries.
Family trusts, like most trusts, have three major players:
The grantor or settlor, who creates the trust and transfers assets into it.
The trustee (or trustees), who manage(s) the trust for the beneficiary. If the trust is revocable, the grantor can also be the trustee and appoint a successor trustee in case he or she becomes unable to handle trustee responsibilities in the future.
The beneficiary (or beneficiaries), who will inherit assets or gain financially from the trust.
Best for: Ease of use. Cost: One-time fee of $159 per individual or $259 for couples. $19 annual membership fee thereafter.
Best for: Users who want an all-inclusive experience. Cost: $99 per year for Starter plan. $139 per year for Plus plan. $209 per year for All Access plan.
Best for: State-specific legal advice. Cost: $89 for Basic will plan. $99 for Comprehensive will plan. $249 for Estate Plan Bundle.
Family trust vs. living trust
The main difference between a family trust and a regular living trust is that in a family trust, all the beneficiaries are family members of the person who created the trust.
How to set up a family trust
Although some particulars vary depending on your state’s laws, setting up a family trust typically involves three steps:
Draft the family trust document. Your trust document will need to contain the names of your family beneficiaries and what each will inherit, as well as a list of the assets in the trust and the name(s) of your trustee(s).
Incorporate state rules. You can hire an estate planning attorney or use an online will maker to set up a trust. Whichever method you choose, be absolutely sure you’ve met all your state’s requirements and have the required signatures to create a valid family trust; even small errors or omissions could cause big headaches.
Fund the family trust. The grantor transfers assets — such as bank accounts, investment accounts and real estate — to the trust by retitling the assets in the name of the trust. Once transferred, these assets become the trust’s assets. Assets transferred to an irrevocable trust remove the assets from the grantor’s control in the eyes of the IRS, which could reduce estate taxes — although most estates aren’t large enough to be subject to estate tax. The federal estate tax ranges from rates of 18% to 40% and generally only applies to assets over $12.06 million in 2022 or $12.92 million in 2023.
If you’re planning to create a family trust, you have a number of different trust types to choose from, such as:
Spendthrift trust: A spendthrift trust limits a beneficiary’s access to the trust assets according to specific terms the grantor sets. Spendthrift trusts help ensure that beneficiaries can’t squander their inheritance; they also protect trust assets from creditors
Cornell Law School Legal Information Institute. Spendthrift trust. Accessed Jul 11, 2023.
.
Testamentary trust: A testamentary trust is a trust created by the terms of your will and only funded upon your death. Beneficiaries can only access the assets at a predetermined time. Testamentary trusts can be used to give a surviving spouse an income or provide children funds once they’ve reached a certain age.
Bypass trust: A bypass trust transfers a spouse’s share of the estate to a trust at death. The surviving spouse may get income from and use the trust assets; however, the trust’s beneficiaries inherit the assets when the surviving spouse dies.
Pros and cons of family trusts
Advantages of a family trust
Including a family trust in your estate plan offers many advantages.
Avoid probate: Unlike wills, trusts typically don’t have to go through probate, and your assets transfer to beneficiaries quickly and smoothly, without the time and expense that probate involves.
Avoid a conservatorship: If you choose a successor trustee or co-trustee to manage your trust, you might be able to avoid conservatorship if you become incapacitated.
Privacy: Because you avoid probate, which is public record, what your family inherits from you via a family trust remains private.
Less vulnerability to a court challenge: Because they avoid probate, trusts tend to be more difficult to contest than wills, and because trusts are private, fewer people will know about your estate.
Flexibility: A family trust lets you decide who gets what and when. You can also help ensure that family members with functional needs don’t lose access to government benefits because of their inheritance. Additionally, if your trust is revocable, you can add or remove assets or change your beneficiaries as you see fit.
Tax planning vehicle: Certain types of family trusts can help reduce estate taxes, though most estates fall below the threshold for estate taxes. However, income over $600 generated by trust assets may be taxable
.
Disadvantages of a family trust
Family trusts also have a few disadvantages to be aware of.
Cost: Hiring an estate planning attorney to set up a family trust can be expensive. Additionally, you may have to pay court fees and compensation to your trustee.
Paperwork and complexity: Creating a trust and transferring assets can require complex paperwork and recordkeeping.
Higher tax rate: Trusts have their own tax brackets, and the threshold for the highest bracket is lower than for individuals. This means trusts might pay higher taxes on the income their assets generate.
Hi Jesse – my husband and I just received a $600K inheritance.
We earn modest incomes and live modestly and don’t know what to do or how to best handle this money.
We still have about $40K of student debt. Those payments are paused, but once it kicks back in the interest rates are ~5%. That’s our only debt.
We rent an apartment and would like to buy a house. Our ideal home would cost $500K in our city. We already have ~$50K set aside for that.
We contribute to our 401(k) accounts and our Roth IRA accounts, but have never earned enough to be able to max them out.
We’re at a loss in a few areas…
We don’t know what we don’t know. What are some big things we’re likely missing?
Taxes. Do I need to be worried about taxes this year? In future years?
Spending. This money seems like our “big chance.” We’re petrified of spending it and ruining our future. But we don’t want to die on a pile of unspent cash.
Investing. Should my investing strategy change?
Taxes
Let’s start with the tax surrounding inheritances.
Inheritance taxes get charged to the recipient of an inheritance, like Felicia. Thankfully, there is no Federal inheritance tax. Six states (Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey, and Maryland) charge an inheritance tax.
Estate taxes get charged to the estate of the deceased, prior to money being distributed to inheritors. Felicia already dodged this. There is a Federal estate tax, but it kicks in above $12.92M in assets (for individuals) or above $25.84M (for couples) [as of 2023 IRS tax code]. Some states have estate taxes as well.
Capital gains taxes generally do not apply to inheritances at the time they are given. But if the assets in your inheritance (e.g. stocks) appreciate in value, you will owe taxes on the capital gains if/when you sell them.
Income taxes generally do not apply either, except in one common case: an inherited 401(k) or IRA. The deceased never paid income taxes on any of their Traditional retirement contributions, so the IRS mandates that the inheritor pay income taxes from their inherited IRA. As of this writing, the tax code stipulated that all assets in an inherited IRA must be withdrawn within 10 years of the decedent’s death – with appropriate income tax paid by the inheritor at each withdrawal.
Spending
Felicia’s concern over spending is the epitome of personal finance. $600,000 is a lot of money no matter who you are, but especially so if you’ve come from a modest background. Felicia’s right to see this inheritance as a big financial opportunity.
But I hope to dispel her feeling “petrified.”
This inheritance is an opportunity for good. For flexibility. For choice. For fun. Just ask yourself: would you rather have $600,000 or zero? The fact that we all have the same answer suggests that Felicia’s inheritance is positive.
So where do the negative feelings come from?
It sounds like part of Felicia’s fear is the (potential) future regret if she and her husband somehow screwed up this scenario. They never thought they’d get lucky like this. What if they don’t seize their opportunity? What if they let themselves and their family down?
This is why financial planning matters.
Felicia and her husband need to build a plan for their assets. The financial order of operations is a great starting place. Based on her situation, that plan should probably include:
A small amount for immediate pleasurable use. There’s no hard rule, but som=ething in the ballpark of 5% or $10,000 feels right. Go take that trip you’ve been wishing for!
Debt payoff. I would recommend Felicia immediately pay off her $40,000 student debt. It will ease her burden (she cares about it enough to mention it in her question) and the payoff is equivalent to a 5% return on those assets. This does not mean debt payoff should be part of all inheritance scenarios. But in this case, I think it’s smart advice.
Earmarking for a home purchase. 20% is a typical down payment. That’d be $100K for a $500K home. More is better. And there are those pesky closing costs. If Felicia’s home purchase timeline is “ASAP,” I’d recommend Felicia set aside $100K of this inheritance into a high-yield savings account for this specific purpose.
“Endowed” spending. Felicia mentioned the desire to avoid “dying on a pile of unspent cash.” I think it makes sense for her to pre-plan a small percentage of spending every year. Something in the 1-2% range, or $6K – $12K, feels about right. Let’s pick a number: $9000 per year. Felicia could spend it on fun, or on making many small facets of life a little bit better. To accomplish this spending, Felicia should set aside a chunk of money today – say, $150K – into a conservative, diversified portfolio for the specific purpose of annual, purposeful spending. We’ll talk about this again in the Investing section below.
If you’re keeping track, we’ve earmarked $300,000 of Felicia’s $600,000 inheritance.
$10,000 for a fun trip right away.
$40,000 to pay off college debt.
$100,000 for a home downpayment.
$150,000 for ongoing “endowed” spending.
What to do with the remaining $300,000?
Investing
The remainder of Felicia’s inheritance should be invested for the long haul. But other portions of her Spending assets should probably be invested too.
Her specific investing allocation depends on the unique goals and timelines of the assets.
Home Purchase: We already covered that $100K should be “invested” (really it’s deposited) into a high-yield savings account, earmarked for Felicia’s home purchase. It’s cash, earning ~4% in today’s interest rate environment, and insured by the FDIC.
“Endowed” spending. If Felicia sets aside $150K for annual, purposeful spending of $9000 per year, that $150K should be invested. Why?
While some of that $150K is short-term (e.g. the $9000 spent this year), much of it is long-term.
If we think of the $150K as a true endowment (like a university), the $150K principal itself should be left alone as much as possible.
Something like a 50% stock, 50% bond portfolio allocation for this $150K combines Felicia’s needs for short-term capital and conservative long-term growth.
Long-term money. The remaining $300K should be invested for the long run. Depending on Felicia’s specific risk tolerance, a stock allocation of 70-100% is appropriate, with the remaining assets in bonds and (if she’s seeking further diversification) a small sleeve of alternatives. For now, let’s just say she invests these $300K at 80% stocks, 20% bonds.
We can add these buckets up to see that Felicia’s total portfolio is:
25% Cash: $100K, plus the original $50K she had earmarked for a home purchase.
25% Bonds: $90K in her “Endowed” bucket, plus $60K in her “Long-Term” bucket.
50% Stocks: $60K in her “Endowed” bucket, plus $240K in her “Long-Term” bucket
This might be a big change from Felicia’s prior investing allocation. But our logical investing framework should work for everyone at any crossroads in their life:
Identify your goals.
Apply dollar amounts to them.
Determine timelines to reach those goals.
Invest appropriately. Shorter timelines demand lower-risk assets, and vice versa.
This is the famous “bucket your money” method.
Other Things?
What else? Did Felicia miss anything?
Felicia and her husband should certainly start maxing out their Roth IRA every year. If nothing else, they should pull $13,000 from their “Long-Term” taxable brokerage and deposit that money into their Roth IRAs.
Should they max out their 401(k)? They certainly should get the match – it’s free money! But beyond that free money, they should weigh the benefits of the 401(k) tax advantage against the cost of locking up money until age 59.5. This article breaks down that important 401(k) math.
Now that Felicia & Family have some assets, they should revisit their estate plan (if they had one in the first place). Talking with an estate planning attorney and a CFP financial planner is a great start.
Finally, Felicia seems to be doing a good job doing her “homework.” You don’t want to rush these kinds of decisions, but you also don’t want to delay too long. Take your time, do your research, but then execute a plan.
Thank you for reading! If you enjoyed this article, join 6500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
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If you prefer to listen, check out The Best Interest Podcast.
Want tax-free investment growth? Want more control over your retirement savings? Want to leave a bigger inheritance? If so, you should consider contributing to or converting existing retirement savings to a Roth IRA.
For Not-Yet-Retirees
The biggest difference between a Roth IRA and a traditional IRA is the tax treatment of contributions and withdrawals. With the Roth, contributions aren’t tax-deductible, but withdrawals are tax-free (as long as you follow the rules). For the traditional IRA, contributions might be deductible; investments grow tax-deferred, but withdrawals are taxed as ordinary income — the highest rate possible.
To decide which is best for you, start by determining if you’ll be able to deduct contributions to a traditional IRA. If you’re not covered by a plan at work, a contribution to a traditional IRA is fully deductible. If you are covered, then deductibility begins to phase out at an adjusted gross income (AGI) of $55,000 for single filers ($89,000 for married couples) and is gone completely at an AGI of $65,000 ($109,000). Contributing to the Roth is then a no-brainer, assuming you’re eligible (see fact sheet below).
If you can deduct your contribution to the traditional IRA, you’ll have to do some calculations to decide whether a traditional IRA or Roth makes the most sense. The conventional wisdom is that a traditional IRA is better if your tax bracket today is higher than what it will be in retirement. But if you’re more than 10 years away from retirement, this is a guessing game. Go with a Roth for all the other benefits.
Another bonus for younger savers: Contributions to a Roth IRA can be withdrawn anytime tax- and penalty-free, even if you haven’t reached age 59-1/2 (but you will pay a 10% penalty on earnings you withdraw early). So if you’ll need the money before then, you can get it. Finally, there are two other important differences between a traditional and Roth IRA: There no required minimum distributions at age 70-1/2 from a Roth IRA, and you can contribute beyond that age as long as you have earned income.
For Retirees
Since there are no required minimum distributions from a Roth, you can let your investments grow tax-free for as long as you don’t need the money. And unlike distributions from a traditional IRA, non-taxable distributions from a Roth IRA aren’t included in the calculation that determines whether your Social Security benefits will be taxed, which might mean double the tax savings.
For Heirs
The tax treatment of IRAs is the same for owners and beneficiaries. Anyone who inherits a traditional IRA will have to pay ordinary income taxes on the distributions. Not so with the Roth. The account will still maintain its tax-free status. And nothing says “I love you” like giving someone tax-free retirement savings. (Keep in mind that all accounts, IRAs or otherwise, are subject to estate tax if the combined value of a decedent’s assets exceeds the exclusion amount, which is $3.5 million in 2009.)
Roth IRA Fast Facts
Who can contribute? Anyone with earned income. Eligibility begins to phase out for single taxpayers with an adjusted gross income above $105,000 and married taxpayers above $166,000.
How much can I contribute in 2009? $5,000 (plus another $1,000 if you’re age 50 or older).
Are contributions tax-deductible? No.
How are withdrawals taxed? They’re tax-free, as long as you’re age 59-1/2 or older and the account has been open at least five years.
Must I take money out at age 70-1/2? No.
Why is it called a “Roth”? Named after Delaware Sen. William Roth Jr. (also known for leading investigations into Pentagon overspending that uncovered the infamous $9,600 wrench and $640 toilet seat).
Why is it so good for colds? You’re thinking of “broth.”
Should You Convert to a Roth IRA?
A traditional IRA can be converted into a Roth IRA by anyone whose modified adjusted gross income is below $100,000. The converted amount will count as taxable ordinary income in the year of the conversion (unless the IRA contained non-deductible contributions). But for many people, that one-year tax bite is worth the subsequent years of tax-free growth.
Here are the factors to consider:
Generally, convert only if you can pay the taxes from sources other than the converted funds, especially if you’re younger than 59-1/2 and will have to pay a 10% penalty on the money you withdrew to pay the taxes.
If you’re near retirement and you expect to be in a much lower tax bracket, the conversion probably won’t be worthwhile. This is also true if the conversion will push you into a higher bracket than where you’ll be when you take money out of the Roth.
If you’re in a lower tax bracket now but required minimum distributions at age 70-1/2 will push you into a higher bracket, converting portions of your traditional IRA to a Roth over a few years (partial conversions are okay) might smooth out your taxes.
If you expect to pay estate taxes, a conversion will save your heirs money because the taxes you pay today will reduce your estate, and assets in a Roth for your heirs will be subject to estate taxes, but not income taxes.
Want some help crunching the numbers? Fiddle around with the calculators on The Motley Fool retirement page.
For more information on the wonders of the Roth, check out the Get Rich Slowly series on Roth IRAs: What is a Roth IRA and why should you care?, How to start a Roth IRA (and where to do it), Which investments are best for a Roth IRA, and Questions and answers about Roth IRAs.
People inherit less than you might expect. In fact, most people think they’ll inherit far more than they really will.
If you do inherit money, it most likely won’t be subject to federal estate taxes. In 2023, those apply only to estates worth more than $12.92 million. But very few households have that level of wealth and most people inherit nothing at all. Here’s what the inheritance landscape looks like, according to the Federal Reserve’s most recent Survey of Consumer Finances from 2016 to 2019. If you need help with your estate plan or have received an inheritance, consider working with a financial advisor.
Why the Average Inheritance is Misleading
On average, American households inherit $46,200, according to the Federal Reserve data. But this figure is inflated by top-tier wealth and belies the fact that many households inherit no money at all.
Of those that do receive a bequest, most receive a small fraction of the average. The top 1% and 10% of households by wealth receive so much that their estates pull the average up. This creates the impression that many, if not most, households receive a comfortable nest egg. Very few actually do.
While less than a third of all households inherit any money, between 70% and 80% of households receive no inheritance at all.
Average Inheritance By Wealth Level
A consistent reality with inheritance is that almost all households who receive an inheritance expect more than they get. This may have to do with the prominence of estate taxes in the national debate, which creates the impression that inheritance and estates are a matter for ordinary Americans. Here’s a look at how much households with varying levels of wealth inherit.
Top 1%
Average inheritance: $719,000 Expected inheritance: $941,100
Measured by wealth, the top 1% of households receive overwhelmingly more than any other group measured. This is what causes such dramatically skewed data when it comes to measuring averages. This group receives more than four times as much as the next wealthiest cohort.
Next 9%
Average inheritance: $174,200 Expected inheritance: $266,600
The average inheritance for the remainder of the top 10% of households is significantly less than those at the very top but still considerable: $174,200. Then again, these households end up inheriting 35% less money than they expect to receive.
Next 40%
Average inheritance: $45,900 Expected inheritance: $60,100
On average, the next 40% of households receive an inheritance that’s closest to the national average. These households are also the most realistic in their expectations. All other cohorts expect vastly larger inheritances than they will receive. This swath of the population overestimates its inheritances by a relatively modest amount.
Bottom 50%
Average inheritance: $9,700 Expected inheritance: $29,400
A national average of $46,200 does nothing to communicate the fact that about half of all households who do receive an inheritance will get less than $10,000. In fact, this cohort expects to receive nearly three times what they will actually get.
The bottom half of households is the cohort that’s also least likely to receive any inheritance at all. With lower rates of college education and lower earnings, these households should not expect to share wealth among generations.
Do You Have to Pay Taxes on Inheritance?
Chances are that you won’t have to pay any taxes on money or property you inherit. In 2023, the federal estate tax only applies to estates that transfer more than $12.92 million to beneficiaries. Keep in mind that it’s the responsibility of the decedent estate’s to pay this tax, not the person or entity that receives an inheritance.
The tax is only applied to property that exceeds the $12.92 million threshold. So if an estate is worth $13 million, only $800,000 would be subject to the federal estate tax in 2023.
Some states also charge their own estate taxes on top of the federal levy. However, a few states also tax those who receive inheritances. These levies are known as inheritance taxes and the following states have them:
Kentucky
Maryland
Nebraska
New Jersey
Pennsylvania
Iowa*
* Iowa is phasing out its inheritance tax by 2025
Bottom Line
While the average inheritance is $46,200, only a small percentage of households end up actually inheriting money. For households that do receive inheritances, the size of those windfalls can vary greatly for those in the top 1% of households compared to those in the bottom half.
Estate Planning Tips
Many people want to make sure they leave something behind for the next generation. If that’s you, make sure to avoid these five common estate planning mistakes.
A financial advisor with estate planning expertise can help guide you through the sometimes complicated process of building an estate plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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.
What’s Ahead:
1. Have a rough idea of the amount that you are set to inherit
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
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
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 ofannuitiesis that they can be used to shore up an adequate retirement plan.
Read more: What 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, andeven 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
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
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.