Boldt: Disclosing estate plans in advance can save strife later

By Matthew C. Boldt

Estate planning clients, typically those nearing or beyond retirement, often ask what kind of information they should share during life with the beneficiaries of their estate. If one child will be treated differently than others, how should they address it, if at all? Should they disclose the fact that an inheritance is likely? (Research shows significantly fewer people expect an inheritance compared to those who receive one). What if the inheritance is expected to be large? Depending on the circumstances, advance discussions among the family are often the best way to ensure family harmony.

Many estate planning attorneys have had occasion to tell clients that “fair does not always mean equal.” Some clients have family circumstances that cause them to leave a majority, even most, of their estate to only one child. Perhaps one child has special needs that require more specific, and preferential, planning. Sometimes parents favor a child who has not been materially successful in life, at least compared to their relatively comfortable siblings. Sometimes one child has received substantial property during the parents’ lifetime, such that no portion of the estate will be left to them. Regardless of the reason, if one child will receive little or nothing from one’s estate, if practical, this fact should be relayed to that child in advance.

Some clients ask if they should discuss the value of their estate with those who will receive it. Data compiled by the Federal Reserve Board shows that over half of any given inheritance totals $50,000 or less, and over 80% of inheritances are less than $250,000. Research has shown that only half of what one inherits is used to invest or pay down debt; the balance is spent, lost in investments or donated. Regardless of the size, many clients expect the beneficiaries of their estate to preserve inherited funds and use them wisely. To realize that expectation, families should work together and implement a plan that prepares beneficiaries to be good stewards of their inheritance. The plan might be as simple as a few conversations about saving and investing. It might include meeting with the parents’ investment adviser or encouraging children to establish a relationship with an investment adviser of their own.

For families who have larger estates to pass on, annual gifting can be a good way to acclimate adult children to the eventual receipt of a substantial sum of money or assets (i.e., a “windfall” — defined by Merriam-Webster as “an unexpected, unearned, or sudden gain or advantage”). Annual gifting can also be a method to foster good habits and temper the “easy come, easy go” attitude that often drives clients’ concerns. Of course, much of what a client decides to disclose and the behavior they want to encourage is driven by personal values, family dynamics and specific concerns, things that the estate planning attorney can learn about while crafting or reviewing the estate plan.

For those who have planned carefully and worked hard toward a goal, in part, of leaving an inheritance to their children, the practice of having candid family conversations furthers that goal. Children, typically adults, who inherit significant sums of money need to be prepared and aware of how to manage it. The character of an inherited asset, such as an IRA, might have unique rules regarding when and how it must be transferred to the beneficiary and the beneficiary’s tax liability upon receipt of it.

Legislative changes can also stimulate family planning conversations. A recent example is found in the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act, which passed by an overwhelming majority in the U.S. House of Representatives. The Senate has not yet taken up the measure, so it is not yet law, though many believe it will become so in one form or another (a similar bill, the Retirement Enhancement and Savings Act, is in committee in the Senate). The stated overall mission of the SECURE Act is beyond the scope of this article, but relevant to planning considerations and making sure children are prepared to act wisely with their inheritance is the SECURE Act’s end to the ability to “stretch” required minimum distributions from an IRA.

In basic terms, the IRA stretch extends the period of time that funds in a retirement account benefit from tax-deferred growth. The benefit is achieved by measuring the amount of required minimum distributions according to the life expectancy of the person who inherits it, rather than the life expectancy of the original owner. As a result, one who inherits an IRA can take lower required minimum distributions for a longer period of time. The benefits of the stretch made IRAs attractive estate planning vehicles such that many people hold substantial sums in their retirement accounts. Under the SECURE Act, funds from an inherited IRA must be withdrawn by the end of the 10th year following the original account owner’s death (surviving spouses and disabled beneficiaries are exempt from the 10-year rule, as well as minor beneficiaries during the period of their minority). If the stretch is eliminated, children who stand to inherit an IRA will likely need to withdraw the money over a shorter time period. Advance family planning discussions can help those who stand to inherit an IRA develop a strategy to withdraw the inherited funds in a tax-effective manner.

Estate planning attorneys naturally focus a lot of attention on how a client’s estate will flow when they pass away. But it is important to use the information we learn about our clients and their families to help them prepare for the future and, ultimately, to honor the client’s intent.•

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• Matthew C. Boldt is an associate at Lewis Wagner LLP. Opinions expressed are those of the author.