Surveys show that even currently wealthy Americans believe they’ll need future inheritances to maintain their standard of living. If that’s true, many clients have a lot to bear in mind regarding inheritance taxes—now and in the future.
Merrill Edge recently found that a third of “mass affluent” Americans from Gen Z to baby boomers with investible assets of at most $250,000 are waiting on inheritances to achieve financial stability.
The matter becomes more important on the lip of the Great Wealth Transfer, where $70 trillion of assets is expected to be passed down to younger generations over the next two decades.
“This, paired with the current economic uncertainty, leads many individuals to see inheritance transfers as a source of stability, both for the older generation looking to support a younger one and for a young generation looking to maintain or improve financial status,” said Patrick Hicks, legal counsel at the estate planning consultancy Trust & Will in San Diego.
The type of assets matter a lot, said Clark Kendall, president and CEO of Kendall Capital in Rockville, Md. “Cash, stock portfolio, real estate?” he aid. “Raw land in Montana or commercial rental space in Time Square? A small business with employees? Is the business profitable, salable? Are they inheriting retirement accounts—fully pre-tax contributions or Roth contributions?
“How the inheritance will be distributed?” Kendall added. “Directly or with constraints, such as the sale of an asset is to be agreed upon with other beneficiaries, [or] the sale can only happen after a certain period of time and so on? The assets could also be left in trust and another person or corporation could be the trustee.”
The type of transfer has significant impact, another planner said.
“Whether an inheritance is to be received outright or in trust can create significant differences for the heir/beneficiary,” said David Levi, a CPA and senior managing director at CBIZ MHM in Minneapolis. “An outright inheritance provides the heir with full control and access to the assets, while a trust structure generally places limits on amounts and timing of distributions and investments of funds transferred at death.”
One of the big inheritance changes is the requirement to withdraw pre-tax retirement dollars over a set time.
“If you’re dealing with an inherited pre-tax IRA worth [millions], the inheriting client will have to take that into income over the next 10 years and that could very well push them up through several tax brackets into a very high tax situation,” said Bruce Primeau, a CPA and president of Summit Wealth Advocates in Prior Lake, Minn. “A second [consideration] could be either a federal or state inheritance tax must be paid.”