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Determining Who Should Inherit Your Wealth

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How to Decide Who Inherits Your Estate

When estate planning, one of the first and most important decisions you’ll make is determining who (or what) will inherit your wealth. To some, this question is easily answered. They want to keep it simple and will designate their spouse first and then their children second, in equal portions. For others, the answer isn’t so clear. Perhaps you want to address the fact that your family members have different needs or abilities. You may not have a partner or children, but perhaps you have philanthropic goals or wish to provide for a dear friend or beloved pet. Most distributions are possible with the right planning. Consider the following as you determine who should inherit your wealth.

Leaving wealth to your spouse

Almost by default, many married couples own the majority of their assets jointly, such that if one of them dies, ownership is automatically transferred to the surviving spouse. This titling concept is often referred to as “jointly with rights of survivorship.” There are ways to opt out of this common ownership (e.g., purchasing assets in your own name or buying property as joint owners without survivorship rights), but, commonly, opening a new account or buying an asset with your spouse means you are set to inherit that asset upon their death. Wills and trusts are helpful to designate secondary beneficiaries should something unexpected happen to your spouse. If you’re divorced, don’t forget to update beneficiaries on accounts and life insurance policies to ensure these assets are not inadvertently passed along to your ex-spouse.

Leaving wealth to your children

Families can be motivated by different factors when deciding how much each of their children will inherit. While splitting an estate equally between all children is often the least controversial choice, an equal distribution may not accurately reflect your family circumstances. There may be reasons to consider giving more or less to one child or another.

Reasons to give to children equally:

  • Designating an equal inheritance is often seen as the fairest option, causing the least amount of anxiety and conflict among heirs.
  • Divvying up assets equally makes sense when each child’s financial situation, past support and opportunities are similar.
  • Leaving equal assets decreases the chance of a child contesting the will.

Reasons to give different amounts to different children:

  • Equal distribution does not necessarily mean equitable distribution. If you have financially supported one child more than others, it may make sense to leave more to the children who have been less favored.
  • You may decide that one child needs more financial support than another. For example, you may believe one child has chosen a career path that will lead to a comfortable financial position, while another may have more difficulty achieving that same financial security. In this case, you may choose to leave more assets to the child with more apparent needs than the other.
  • If one of your children has a mental or emotional disability and is not capable of providing for him/herself, it may make sense to provide additional financial resources to support that child.
  • If one of your children committed significant time and/or resources to providing care during your lifetime, you may wish to show your appreciation by bequeathing additional assets.
  • You may wish to leave more assets to biological children than step children, depending on how and when your families were combined.

If you decide to leave different amounts to each of your children, be aware that choice may lead to hurt feelings or resentment. If preserving family harmony is important to you, consider communicating your wishes and reasonings with your children while you are alive. This can help your children understand and (hopefully) accept your wishes and ensures no one is surprised upon your death.

Leaving wealth to charity

There are several common methods of donating assets to charity following death, either as a primary or contingent beneficiary. If you have a taxable estate, some methods can also help reduce a potential estate tax burden.

  • Make a charitable bequest – This is perhaps the easiest way to leave assets to a charity. Simply state that you wish to leave a certain amount or certain accounts to a favored charity. Remember to specify if the gift should be used for the entity’s general purposes or a more specific purpose and whether the named charity is for a local chapter or the broader organization. Your estate planning attorney can help effectively write your request to ensure your wishes are carried out properly.
  • Name a charity as an account beneficiary – Another way to leave assets to a charity is to designate an organization as the beneficiary on a retirement account or life insurance policy. When structured properly, this can help maximize the amount the charity receives, while also lowering the value of your taxable estate.
  • Establish a donor-advised fund or charitable foundation – If your goal is to fund a gifting vehicle that lasts longer than a one-time gift, you may want to consider establishing a donor-advised fund or private foundation. Donor-advised funds and private foundations both allow you to create legacy gifting schemes to your preferred charitable entities and causes. There are differences between the two vehicles, including various administrative costs, maintenance, and gifting opportunities, and your advisor at Creative Planning can help you determine if either approach would be a good fit for your plan.

Regardless of your charitable giving method, it’s important to clearly communicate your wishes to family members to help ensure your assets are passed along uncontested. A bit of advanced planning and a few difficult conversations can go a long way toward ensuring your charitable giving wishes are carried out.

Do you have a share to spare?

While the situations above address the beneficiaries we see most commonly in estate planning, there are many clients who wish to make gifts to other relatives, friends or pets. Consider if you wish to make a gift of a certain tangible good, a specific dollar amount or a percentage of your overarching estate. When making gifts of pets, consider not only who will care for your animals but also whether you would like a cash gift set aside for care and feeding. Horses and more exotic domestic animals can require specialized attention and care, so be mindful of planning for all members of your family, warm- and cold-blooded alike.

Could you use some help determining the best way to pass along your wealth? Creative Planning is here for you. We work with clients to identify and execute charitable gifting strategies that can help maximize their impact and minimize their tax liabilities, all while leaving a lasting legacy for future generations. For help with your estate planning strategy, or with any other financial matter, please contact us.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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