The federal estate tax threshold is $12.06 million per individual; the current administration wants to lower this dramatically. Several states also have inheritance taxes on top of federal inheritance tax—some with thresholds of just a few million dollars.
“The first move we recommend is to make sure their parents or grandparents or whoever they may be inheriting from have an up-to-date estate plan, a plan that allows for flexibility to take advantage of the federal estate and potentially estate tax exemption amounts," Primeau said, "The second is to take a look at whether Roth IRS conversions make sense for those they may be inheriting dollars from.” Assets in Roths grow and are inherited income tax-free, he added.
Heirs should also remember that receiving an inheritance in their 60s, 70s and 80s can essentially lead to inheritances being subject to estate tax multiple times. “If you pass away after receiving an inheritance that increases the size of your estate and subjects it to estate tax, the government is kind of getting two bites at the same apple,” Levi said. “There are ways to manage and address this issue, ‘disclaimers’ being one.”
Preparation can head off disappointment down the road. “I can’t say that we have too many clients that are dependent on inheritances to retire comfortably. We typically prepare or update retirement projections for our clients every year to ensure they’re comfortable ... in retirement,” Primeau said.
“My general advice,” Levi added, “is never, ever count on an inheritance.”