Many people are faced with the decision of whether or not to leave an inheritance to their children. Leaving an inheritance to your kids can be a great way to provide for them. Still, it’s essential to consider the possible negative effects and the reality of the situation your children may face. Here are four things you need to consider before setting up your estate.
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1. Do you have any outstanding debt, Leaving An Inheritance ?
In the United States, the next of kin is not held responsible for any outstanding debts left by the deceased. However, just because your kids aren’t on the hook doesn’t mean they’ll get their entire inheritance. Estate law requires all outstanding debts to be resolved by liquidating the remaining estate; whatever is left over is then given over to the next of kin or whomever the will stipulates.
Paying off your outstanding debt should be a priority to prevent your children from losing their inheritance. Use this debt payoff calculator if you need help figuring out a way to become debt-free quickly.
2. Will your children be subjected to estate taxes?
Spouses are not required to pay estate or inheritance taxes since the marital property is considered to be owned jointly. However, depending on your state and the amount of inheritance, your children may be subjected to an estate tax, inheritance tax, or both. The federal rates vary and are tiered like income tax, but currently range from 18% to 40%, depending on the inherited amount. Your state may also have additional estate tax requirements, so check its Department of Taxation and Finance website for more details. While often unavoidable, it’s important to know how your children’s inheritance will be taxed when making arrangements.
3. Should you use a trust instead of a direct inheritance?
Consider using trusts to disperse your children’s inheritances if you’d like to have a little more structure with your estate. Many families will use structured trusts that give each child a set amount of money for important milestones like attending college or reaching a certain age. Not only will the trust ensure your kids don’t spend their inheritances quickly, but there may also be tax benefits for them, too. Consult an accountant to figure out if it’s a better idea to give your children a direct inheritance or roll that money over into a family trust.
4. Do your children understand the situation fully for Leaving An Inheritance ?
Talking about death and money are never comfortable conversations, but they’re subjects you must discuss openly with your children, so they understand the situation fully. If your children are currently minors, then you’ll need to establish who will be their legal guardian and where they’ll live should you die suddenly. Adult children should be told how your estate will be handled and what they can expect to receive in the event of both parents’ deaths. The last thing you’d want is for your family to bicker or end up in an expensive, drawn-out court battle because of a misunderstanding about what goes to who. So sit down together and go through things like real estate,jewelry, family heirlooms, retirement accounts, and anything else of value before that day comes.
The bottom line
Thinking about your own death is never fun, but that doesn’t mean you should avoid planning for your kids’ futures. Consider these four keystone points when it’s time to plan your estate and communicate the situation with your children so they’ll know what to expect and how much they’ll receive.
