“Deciding whether to leave an inheritance for your children impacts the amount you save, the retirement plans you choose and how you take qualified retirement plan distributions. However, beyond your desire to leave some wealth to your children (or not), there are some essential personal financial issues to consider.”
Some retirees make a big mistake and give their retirement savings away without considering their own income needs. Before you make gifts to others, take a look at how much to spend on yourself. Determine how much you need to save and how much you can withdraw each year, when you retire.
Investopedia’s article, “Challenges in Leaving Inheritance to Children,” says to consider the effect of inflation and taxes and maintain a diversified portfolio of growth and income investments to help your portfolio keep pace with inflation.
The biggest unknowns with retirement income and children's inheritance are unexpected illness and high healthcare costs. Government programs are frequently not helpful in paying for nursing homes and other forms of long-term medical care. Medicare covers nursing home stays for a very limited period. Medicaid mandates that you spend nearly all of your own money, before it will pay for long-term care. You can’t just move assets to family members to qualify for Medicaid, because the program restricts benefits, if asset transfers were made within five years prior to applying for Medicaid. The rules are tricky, when it comes to eligibility.
You can protect your assets from the costs of catastrophic illness with a long-term care insurance policy. However, these policies can be very expensive and have coverage limitations. Consider them carefully.
What happens if you outlive your retirement funds? With longer life expectancies, it's crucial to try to manage retirement-plan withdrawals, so you do not deplete all of your assets during your lifetime.
You could purchase an immediate annuity with some retirement money to ensure a guaranteed amount, for at least as long as you live. Some pension and retirement plans may allow you to stretch payments over single or joint life expectancies, rather than receive the proceeds as a lump sum.
If you expect to inherit assets from your parents, you may be in a better position financially than someone who doesn’t expect to receive an inheritance. Note that certain inherited assets, like stocks and mutual funds, are eligible for a favorable tax treatment called a step-up in basis. If you are leaving assets to others, this could mean significant savings for heirs.
You may also want to set up a trust to control distributions from the estate to the surviving spouse and children. If you or your spouse have children from previous relationships but don't have a prenuptial agreement, trusts can ensure that specific assets are passed to designated children.
You may share your wealth with others by gifting assets, creating a trust, deferring income or purchasing life insurance or tax-deferred variable annuities.
Talk to a Thousand Oaks estate planning attorney at Family Security Law Group, APC to determine the best options for your circumstances.
Reference: Investopedia (November 26, 2018) “Challenges in Leaving Inheritance to Children”