Wealth transition is often misunderstood by clients. Perhaps one of the costliest risks to wealth preservation is the cost to transfer assets to heirs. Not only in terms of tax dollars but in terms of keeping a family whole. The distribution of wealth can tear families apart permanently if not well thought out and properly communicated. I believe in most cases the wealth owner has good intentions but just doesn’t understand all the nuances of how assets are passed to the next generation.
Some of the topics that deserve more attention are transfers of retirement accounts and annuities, Transfer on Death(TOD) designations and acknowledging grandchildren.
It is amazing to me how many clients tell me they are receiving an inheritance. I ask them if the assets are retirement accounts or annuity assets and they simply don’t know. Some assets are received without a tax consequence and some carry large income tax consequences. In one instance a client accepted a retirement account and an annuity from her mother’s estate and the net result was added income taxes of close to $30,000. This is in contrast to a client who inherited multiple retirement accounts and annuities. After several consultations we implemented payouts over a period of years significantly lowering income taxes. The key to making the right decisions is to get your financial adviser involved before you accept inherited assets. Ask the right questions and know what your options are before signing anything.
As a client approaches their 80s or, even when they are fine tuning their estate plans due to ill health, the subject of acknowledging grandchildren often arises. In one instance a couple decided to give $10,000 to each of their grandchildren upon the sale of a property late in life. For them, this eliminated the need to name them in their wills and also gave them the opportunity to see how each of the grandchildren enjoyed their advance inheritance. In another case a surviving spouse decided to change their will giving a percentage of their assets to their grandchildren. This significantly changed the estate plan among the surviving children resulting in a huge family conflict. Will this family ever be the same?
In another scenario, a Transfer on Death designation was lifted from an account so that the estate would have sufficient liquidity to pay the Pennsylvania inheritance tax. This was a good idea. However, in another case the transfer of death designation eliminated the ability of the Last Will and Testament to bequest monies.
In real life the problem is that attorneys aren’t always aware of the titling of investment accounts or current beneficiaries. Financial advisers aren’t always privy to the most current Last Will and Testament. So whose job is it to make sure both of these directives are coordinated? The takeaway from all of this is that your total assets should be reviewed in context with your Last Will and Testament. Collaboration with your estate attorney and your financial adviser are key to a successful wealth transfer.