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Not just for rich people: 6 ways we're messing up inheritances

By Richard Eisenberg

Retirement is a great time to start essential conversations about wealth transfers and to begin 'giving while living'

Exactly how much money will get passed down from one generation to the next over the next 20 years is anybody's guess -- estimates range from $17.5 trillion to $68 trillion. But this much is certain about the Great Wealth Transfer: We're doing it wrong.

There are six specific ways we're bungling inheritances.

If you or your parents are retired and have children or grandchildren, now is the time to take steps to make transferring your assets -- and passing along your values -- more meaningful for your family. You might save those kids from owing some taxes, too.

"Everybody seems to think inheritances are something for rich people," says Laura Varas, chief executive of Hearts & Wallets, a financial-services research firm that recently released a fascinating study about wealth transfer in the U.S. But in fact, she notes, "inheritances are a mass-market thing."

She's especially right when you broaden the definition of inheritance to include passing down your views about money and about doing good. Susan Turnbull, the owner of Personal Legacy Advisors in Manchester, Mass., calls this "the missing piece of estate planning."

Read:My mom had a trust, so why do we still need probate to settle her estate?

Here are six ways I think people and their financial advisers are messing up inheritances -- and how we can do it better.

1. Parents aren't talking with their adult children about the inheritances they will receive

Hearts & Wallets estimates that roughly half of those receiving inheritances these days are 55 and older, and that only 54% of people receiving inheritances had discussed them with the donors in advance. "To be able to really talk about this looks like a pretty big unmet need," says Varas.

Many parents and their adult kids fail to have this conversation because it's fraught, dealing as it does with death, financial information and, sometimes, sensitive family issues.

But making your bequests a surprise that is only to be revealed when you die can lead to misunderstandings and even anger among family members.

"I would argue that it is an act of love, courage and kindness to have those hard conversations while you are still alive," says Suzanne Schmitt, head of financial wellness at New York Life. "I know it's not easy. We've done it in my own family."

2. We aren't talking enough with our parents about the wealth transfers they hope to make

The conversations we have with our parents about inheritances are often just as hard as the ones we have with our kids -- or harder. Parents may be uncomfortable discussing money and could view kids who broach the topic as money-grubbing.

But it's really about ensuring your mom and dad have arranged to pass on any inheritances as they'd prefer and that they have the essential documents that will allow their wishes to be carried out.

3. We're thinking about inheritances too narrowly

Many of us need to start thinking about making our values and priorities around money an essential part of what our children and grandchildren will inherit from us -- even if their values and priorities may differ from ours.

4. We're often waiting too long to bestow money on our kids and grandkids

Typically, when parents give their adult children money, it happens after death, through a will or trust. An alternative -- or complementary -- technique is known as "giving while living."

That's when you make gifts to your adult children while you're still alive and, for example, you know they could use help to buy a home, save for their kids' college educations or for their own retirement, or pay bills during tough financial times.

Also read: Why is old age so unhealthy in the U.S.?

5. Financial advisers aren't doing enough to help families talk about inheritances

Traditionally, estate lawyers and financial planners have looked at their work with inheritances quite narrowly: Creating wills and trusts and helping clients save on taxes. Rarely have they discussed with clients and their adult kids the meaning behind those inheritance plans.

"If the only lens we're looking at families through is either paying the least amount in taxes or optimizing around the growth and preservation of financial capital, we are really missing the boat," says Kristin Keffeler, author of "The Myth of the Silver Spoon: Navigating Family Wealth & Creating an Impactful Life"

Keffeler, who is chief learning officer at the Johnson Financial Group in Denver, believes advisers are starting to understand this. She says we're now in the "wealth 3.0" stage of family wealth planning.

Prior to about 1980, wealth 1.0 was about dynastic entitlement, and "you didn't talk about wealth or inheritance," Keffeler says. Next came wealth 2.0, when retirement laws changed, vehicles for accumulating wealth expanded and people began having conversations about the emotional impact of wealth. But narratives were mostly fear-based, Keffeler says.

Wealth 3.0, she says, is a "paradigm shift." Now, she notes, families want answers to questions like, "How do we make sure our kids and grandkids can learn how to engage with inheritances well and healthfully?"

While conceding that most advisers aren't yet on board, she's optimistic that change is coming.

6. We're not doing enough to help our adult kids manage the inheritances they'll get

In a worrisome New York Life survey of people expecting to receive an inheritance, only 42% of millennials and 31% of Generation Z members said they would feel very comfortable financially handling the new wealth. Meanwhile, 49% of boomers and 46% of Gen Xers said the same.

"The younger the person, the less 'real-life experience' they've had, the less likely, in many cases, they have navigated the situation," says Schmitt.

What you and your financial adviser can do

Here's how you and your financial adviser can do a better job planning for the inheritances you'll give -- and get.

The inheritance you'll give your children

Don't start a conversation about this by talking specifics about your financial assets and who'll get how much. Instead, says Schmitt, figuratively hold the hand of your child and talk them through what you've done and planned for with your money.

If you have a will or a trust -- make one if you don't! -- tell your child where the relevant documents are kept and who your financial advisers and attorneys are. Don't forget to pass along your views and priorities regarding money, too.

And take the opportunity to talk about nonfinancial values as well: 65% of adults over age 50 think that values and life lessons are the most important thing to pass on, according to a new survey from Age Wave. Only 22% said financial values or real estate were the most important.

"The most important place to start is an honest conversation about your vision and your values," Keffeler says.

The talk could go something like this, she says: "Mom and I have created a pretty nice nest egg and we're excited that we have something to pass on to you guys. Our goal is that it be a positive force in your life, and to do that, we have to start these conversations. We want to share our vision for how the resources that we've gathered and that we are going to pass on to you might impact your lives. And we want to hear your questions."

Turnbull, who is a member of the Purposeful Planning Institute, a wealth-transfer learning center for professionals, created an ethical-will guidebook called "The Wealth of Your Life" to help initiate such conversations.

She has also made a set of cards called Life Legacy Cards to get things rolling. "Each of the cards is a very simple open-ended prompt to get people sharing experiences, stories and reflections from their lives," Turnbull says. "They're very simple and very powerful."

In addition to leaving a bequest and talking about money lessons, you may want to make a financial gift -- or more than one -- to your adult kids sometime soon.

"That makes for a really positive experience for the recipient and the donor," says Varas.

Adds Schmitt: "To be able to do that can be a tremendous gift that allows that child to really get a stronger financial footing."

There are two reasons why this could be a a good time to make a financial gift to your child. One is the run-up in the stock market and home values, which may have increased your wealth and made you better able to do make such a gift. In 2023, there's a federal tax exclusion for gifts of up to $17,000 per person or up to $34,000 per married couple. The other reason is the Secure Act of 2019, which raised taxes for children who'll inherit IRAs.

Before the passage of that law, if your child received an inherited IRA when you died, they could save on taxes through a "stretch IRA," drawing out taxable payments over decades. Now they must deplete the account in 10 years, which potentially means a much steeper annual tax bill.

"That was basically a massive tax grab," says Varas.

Making a cash gift or a contribution to a grandchild's 529 college savings plan while you're alive, rather than leaving an IRA to be inherited in the future, averts this problem.

Another way to skirt it is by converting some money in your traditional IRA to a Roth IRA, whose withdrawals are tax-free and which don't have required minimum distributions, as traditional IRAs do.

The inheritance you'll get from your parents

Have this conversation as soon as you can. Delaying this talk until your parents' cognition starts to slip could mean never being able to have it.

Schmitt suggests opening the door gently. You might mention a friend who had to untangle a financial mess after their parents died. Or if you have an adult child, you could say that you want to have a conversation with them about inheritance and are looking for some guidance. "Most people, when approached with a request for help, are very apt to give it," Schmitt notes.

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08-23-23 1026ET

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