The Ins and Outs of Leaving an Inheritance


When you’ve saved up a tidy nest egg, you might like the idea of leaving some of your assets to your children some day. Many would love to leave an inheritance for their kids or even their grandkids. In fact, Forbes tells us that Baby Boomers will leave an eye-popping $30 trillion dollars (yes, that’s with a “T”) to their heirs over the next 30 to 40 years. Yet in many cases, seniors who leave an inheritance for their children will wonder if they are leaving enough.  

While it is a wonderful and generous idea to provide for your children one last time after you’ve passed on, it’s not a good idea to ruin your retirement funding and live on a financial edge to do so. Making the decision to leave an inheritance to your kids can affect your plans for retirement – when you plan to retire, how much it will cost you to retire, and how much more you might have to save to make a financial gift a reality.

How Much Do You Really Need?

Remember that no matter how much you want to provide for your loved ones after you’re gone, the priority should be taking care of yourself in your golden years. According to the CDC, the current life expectancy for men is about 74 years, while women have a life expectancy of about 79 years. But of course, keep in mind that this is an average and the hope is that you live much longer than that.

You need to figure out how much you need in retirement funds, based on your age right now and when you want to retire, and then you can consider how much more you want to have in your accounts to leave for your children. This handy retirement calculator from AARP can get you started with figuring out how much you need to live comfortably in your senior years.

Start with Good Investments

Leaving an inheritance likely won’t happen by simply accumulating money in a bank account. Even with excellent earned interest, that might not be enough to cover living and medical expenses into old age and still leave something behind for your loved ones. Use the power of compound interest through various financial options, such as CDs or money market accounts. Retirement funds that contain stable stocks as well as some high-earning wild cards are a good idea.

There are many financial options that don’t require much hands-on adjustment from you. For instance, once you choose your stock options for your 401K, all you have to do is put money into it. Consider maxing out not only your 401K potential contributions (if you can afford it) but also maxing out your allowable IRA account contributions every year.

Keep in mind that you will need to think about taxes on the retirement income earned from interest-earning options. You’ll also need to think about inflation. You might save enough to be comfortable right now, but consider that the money won’t go nearly as far 20 years from now. Rising taxes and inflation can easily strip away any gains that would allow you to leave an inheritance.

Consider Your Healthcare

We usually plan for retirement by taking into account how expenses will rise with projected inflation. But we often don’t consider how much of our hard-earned cash might evaporate in the face of mounting healthcare bills if an unexpected illness or injury hits. Healthcare spending went up by over 9% between 2019 and 2020[1]. And healthcare spending always trends up, never down, so you can expect that the costs will rise even more in the coming years.

As we get older, we suffer from more medical issues. The National Institute on Aging reports that 85% of those aged 65 and older have one chronic medical condition, while 60% of the elderly have two or more. As health conditions worsen with age, your healthcare costs can go up dramatically.

Healthcare costs can also go up if you suffer an injury, like the 20% of people who will sustain a serious fracture or head trauma after a fall[2]. Using personal safeguards like medical alert technology can allow you to reach out for help as soon as an emergency or accident occurs; getting help right away can lead to better outcomes and lower medical bills.

You might believe that Medicare or even Medicaid will be a safety net if you suffer from a serious illness or injury, such as having a stroke or suffering a fall that leads to a fracture. But Medicare might not cover the full expenses of a hospital stay and rehabilitation. Qualifying for Medicaid will almost certainly wipe out any investments you intended to leave for your children, considering that you must spend down almost all of your resources to be eligible[3].

Given the rising cost of healthcare, a long-term care insurance policy is a good idea. Look closely at the cost and the limitations of the policy you’re considering, keeping in mind how long you can lock in the premiums.  Remember that life expectancies are getting longer, which is a great thing – but it can also lead to needing more money in the account to pay for the inevitable declines of aging[4].

How to Leave More Money

There are some ways that you can leave more money to your kids and grandkids, and they don’t require you to simply work more and save more. Here are a few suggestions:

·         Opt for an annuity. Turn your retirement money into an annuity that pays out a guaranteed amount of money each month or year for as long as you will live. While the common solution is to simply take out your retirement in lump sums and transfer it to a bank account for spending as needed, putting money into an annuity makes it easier to budget and could make your money stretch further.

·         Work with the tax code. Some inherited assets can get favorable tax treatment through the step-up in basis. This means that you can save on taxes on mutual funds, stocks, and other assets. Also consider what the inheritance tax rules are for your state. If you have a great deal of money that you want to leave to your kids, it might actually be worth downsizing your home and moving to a state where the inheritance laws are more advantageous to you.

·         Create a trust. When you set up a trust, you can avoid your estate going through probate, which is the process that a person’s estate goes through after their death. This court proceeding serves to figure out exactly what makes up the estate, including assets and investments, and assigning those to the heirs. A revocable living trust means that you maintain the money in your estate but when you pass away, that trust automatically falls under the direction of your designated heirs[5].

·         Gift certain assets. You might be able to get around the “gift tax” by giving your children their inheritance while you are still here. While the amount you can give tax-free might change from year to year, it’s usually a pretty substantial amount – you can give up to $17,000 per person a year as a gift in 2023[6], but even if you exceed that threshold, the difference would be applied toward the high lifetime limit of $12 million per person, so most givers will never have to pay any gift taxes.

·         Invest in life insurance. In most cases, when someone is named as a beneficiary on your life insurance policy and they receive money from that policy at the time of your death, they don’t have to pay taxes on that money[7]. This can be a way to provide a small inheritance for your loved ones that gives them a tax break and allows them to keep more of the cash. Keep in mind, however, that the rates for life insurance go up dramatically as you get older, so the premiums might eventually outpace the gains.

·         Create a will. A will spells out your wishes for your estate after you are gone. If you have a proper will, which is created and signed in the presence of an attorney, it is very likely to be upheld even if a court battle ensues. Assign what you want each person to receive as an inheritance and that money will be pulled from your estate.

Though taking care to control chronic conditions and avoiding the consequences of falls by wearing an in-home or on-the-go medical alert pendant or watch don’t seem like actions that directly affect inheritance, they certainly are things that impact your retirement funds and what you have to leave behind. As healthcare costs rise and you face more expensive medications and treatments, the last thing you want is a serious medical emergency to add to the financial burden. The better care you give yourself right now, the more money you will have left to give your heirs.

How to Talk to Your Kids About Inheritance

You can do all sorts of wonderful things to ensure you leave more money for your children, but if you don’t talk to them about the basics of what you’re doing, there may be a lot of family confusion. If you do plan to leave something to your loved ones, consider these tips:

·         Communicate openly. At some point, you need to talk with your kids about what they can expect. It’s a difficult conversation to have, as talks about money and death can be quite uncomfortable. But laying out the financial information can make it clear what they can expect and allow them to adjust their lives accordingly.

·         Heirlooms are an inheritance too. For some, the money doesn’t matter one bit. What does matter is who gets that cherished trove of letters, the family cookbook, that beautiful serving dish passed down through generations, or that special quilt. Talk with your children about who would like to have these tangible things and put it in writing to avoid quarrels later.

·         Explain if you think there may be misunderstandings. Your kids might wonder why you are doing things a certain way. It’s important to make it clear that while you love your children equally, things might not look so equal when it comes to your decisions on inheritance. If you can’t explain how you feel face-to-face, consider writing a letter to go along with the will that will explain why you structured the inheritance in a certain way. But always remember that these are YOUR assets and you can do whatever you want with their disbursement.

While leaving an inheritance is a wonderful thing for a family, there is the sobering fact that in most cases, the bulk of your savings and assets will go to your loved ones after you’re gone. While your kids will likely be quite grateful for the financial boost, that doesn’t make up for the grieving they will do when you’re no longer with them.

If you suffer from chronic conditions, make sure to keep them under control as best you can through appropriate treatments. Visit your doctor on a regular basis. If you suffer illness or injury, get in touch with your doctor right away. When an emergency occurs, get help fast – the longer you wait, the more difficult the outcome could be. A medical alert system with fall detection is one of the ways you can ensure that if something bad happens,  you can get help immediately. Trust Alert1 to help you take care of yourself into your golden years.