Inheriting assets from a member of your family can be both a blessing and a source of stress. Beyond the obvious benefits of having more funds at your disposal, there are a number of other complicated factors to be mindful of, including how the assets should be managed, the impact it could have on your taxes, and how to help ensure the money benefits you and your family well into the future.
With all that in mind, here are 3 planning options that you may want to consider, which may help you reduce your exposure to estate taxes, efficiently transfer wealth to the next generation, and simplify your financial life.
When one spouse passes away, the surviving spouse is able to inherit the deceased spouse's entire estate without incurring federal estate tax thanks to the unlimited marital deduction—this means that the deceased spouse doesn't have to utilize any of their federal estate tax exemption amount to pass those assets to their husband or wife. In fact, it's possible for the deceased spouse to pass on both their assets and their unused exemption amount so the surviving spouse can benefit from it when they ultimately pass away in the future.
"At the federal tax level, there's a concept called 'portability,'" says Pamela Pirone-Benson, a vice president on Fidelity's Advanced Planning team. Portability allows for the unused portion of one spouse's federal estate tax exemption to be transferred to the surviving spouse. This could potentially double the size of the estate the surviving spouse is able to pass on tax-free when they die. It can be a powerful tool for intergenerational wealth transfer, but one that is surprisingly easy to miss out on if you're not paying close attention to the rules.
"There's a misconception that portability is automatic," says Pirone-Benson. "It's not. Portability must be elected on the deceased spouse’s estate tax return." Depending on your circumstances, you may need to elect portability within a certain time frame following your spouse’s death. It’s important to consult with your estate planning attorney to understand exactly how long you have to take advantage of this election so you can act appropriately.
"I've seen people almost miss out on saving millions of dollars in federal taxes just because they didn't know they needed to make the portability election," says Pirone-Benson.
Disclaiming the inheritance
In some instances, the recipient of an inheritance may decide that, for some reason, they do not want to accept it. Perhaps they have significant assets already and are wary of going over the estate tax exemption amount. They could be concerned about entering a higher tax bracket or may view the inheritance as burdensome in some way—for example, perhaps they would inherit a property that requires significant maintenance or the payment of high property taxes. Maybe the inheritor has debts or liabilities and is concerned that the inheritance would end up going to their creditors. They also may simply want the inheritance to flow to the next generation, perhaps their children, right away.
Potential inheritors have the option to “disclaim” their inheritance, by formally refusing, in writing, to accept the assets that have been left to them. It’s important to note, however, that you can’t dictate where the assets end up. The assets would pass to the next in line according to the decedent’s estate plan, as if you had predeceased them. So if you were hoping that the assets would go to your children or a sibling, it’s best to confirm that the estate plan is set up for such an outcome before availing yourself of this option.
It's also possible to include language in the estate plan to provide the option of passing disclaimed assets into a marital disclaimer trust, which could benefit the surviving spouse during their lifetime but still pass outside of their estate at death. This, however, must be written into the estate plan ahead of time, and would utilize the deceased spouse's estate tax exclusion amount.
"There's a degree of urgency around disclaiming assets," says Pirone-Benson. "It has to be done within 9 months of the date of death. And it has to be done before you receive any assets into your name. Typically, once it's in your name, you can't disclaim it."
There are many nuances to this tactic, particularly as they relate to irrevocable trusts, so it’s important to engage with qualified legal counsel within the 9-month window in order to explore it as an option.
When you inherit responsibility for finances that were previously managed by a loved one who has passed, it may not be easy to immediately grasp the full scope of how they had things arranged. "Many of the people I meet with are dealing with assets and accounts that are scattered all over the place," says Pirone-Benson. "They have piles of statements from multiple banks, stock certificates, estate planning documents—they're looking for help in getting a clear understanding of all their assets and documents and figuring out where everything is."
It can be difficult to manage assets that are spread out across multiple institutions, especially when you aren't the one that originally opened the accounts. If you're finding it challenging to untangle the different financial relationships that a parent or spouse had set up, you may want to consider consolidating your assets with a single firm. Doing so can help to make it easier to track your investments, monitor your asset allocation, and get a complete view of your financial situation. This can come in handy when speaking with your financial professional about potential changes to your strategy or when it comes time to determine how much you may need to withdraw from your retirement accounts to satisfy your required minimum distributions when it's time to do so.
Talk with a trusted financial professional
Before you make any decisions regarding assets you've inherited, it's a good idea to speak with a qualified financial professional who can walk you through the potential benefits, implications, and consequences of these strategies. That way, you can feel confident that whatever path you choose is aligned to your investment or wealth-transfer objectives and can help you get closer to achieving your long-term goals.