How Can I Pass Wealth to My Children and Grandchildren?

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Inherited assets come with benefits, along with some burdens

AARP’s recent article “6 Ways to Pass Wealth to Your Heirs,” says that providing financial security to your heirs including your children and grandchildren after you’re gone is a goal you can reach in several ways.

Lets’ look at a few standard options, along with their pluses and minuses:

  1. 401(k)s and IRAs. These grow tax-free while you’re alive and will continue tax-free growth after your beneficiaries inherit them. Certain heirs, such as spouses and people with disabilities, can hold these accounts over their lifetime. Withdrawals from Roth IRAs and Roth 401(k)s are nearly always tax-free. However, other heirs not in those categories have to empty these accounts within ten years.
  2. Taxable accounts. Heirs now get a nice tax break on investments that have grown in value over time. Say that years ago, you bought stock for $300 that currently trades for $3,000. If you sold it now, you’d owe taxes on $2,700 in capital gains. However, if your son inherited the stock when trading at $3,000 and sold it at that price, he’d owe no taxes on the sale. However, note that the Biden administration has proposed limiting the amount of investment capital gains free from taxes in this situation, which could impact wealthier families.
  3. Your home. If you own a home, it’ll typically be the most valuable non-financial asset in your estate. Heirs might not have to pay capital gains tax on it if they sell it. However, use caution: whoever inherits the home will cover significant expenses, such as upkeep and taxes.
  4. Term life insurance. Life insurance can be an excellent tool for loved ones who depend on your income or rely on your unpaid caregiving. You can get a lot of coverage for very little money. However, you don’t get the money back if you purchase plain-vanilla term insurance and don’t die while the policy is in force.
  5. Whole life insurance. These policies provide a guaranteed death benefit for heirs and a cash-value component you can access for emergencies, long-term care, or other needs. However, these policies are more expensive than term insurance.
  6. Annuities. A joint-and-survivor annuity guarantees the survivor (your spouse, perhaps) a steady stream of income for life. Annuities with a death benefit can provide a lump sum for a beneficiary. However, while you’re alive, annual fees for variable annuities can be high, limiting potential returns. Moreover, cashing in your annuity for a lump sum may be expensive or impossible.

Bonus Tip. Discuss your plans with your children sooner rather than later, especially if you are leaving them different amounts or giving a large sum to a favorite cause, so you have time to explain your rationale. Make sure you have an Estate Planning Attorney design a Will or Trust to convey your wishes.

Reference: AARP (Sep. 9, 2021) “6 Ways to Pass Wealth to Your Heirs”