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Expecting an Inheritance Consider Coordinating Your Estate Plan with Your Parents

Doing some 'upstream' planning now will take the guesswork out of what's coming your way. (opens in new tab) (opens in new tab) (opens in new tab) Newsletter sign up Newsletter (Image credit: Getty Images) By David Handler, J.D. last updated 12 October 2022 Contributions from Howard Sharfman One important aspect of estate planning that can sometimes fly under the radar is "upstream" planning, which focuses on what clients may be inheriting from their parents. This can come into play especially if a client believes they might receive a significant inheritance, because learning those details ahead of time can greatly impact decisions about what to do with their own assets. A brief story. We once had an extremely successful client who amassed a net worth of more than $200 million. His father was also a very successful retired CEO whom we reached out to initiate upstream planning conversations. However, when we asked if he would share his estate planning, he denied us. He never discussed his finances with his son and said he never would. His reasoning was that he didn't want to take away his son's motivation. When he eventually passed, the lack of preparation and communication left his family with an eight-figure estate tax bill. The lesson? If the father would have been willing to engage, the family could have minimized the estate tax bill and could have more effectively planned for the entire family.

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How to Keep Your Heirs from Blowing Their Inheritance It can be beneficial to discuss how the client prefers to inherit any assets they're set to receive. For example, if someone already has a large enough estate that they would pay estate tax on, then inheriting more would only add to that tax burden. Alternatively, parents who are amenable might choose to leave assets to the client in a trust instead. There are several benefits to this course of action. Money in a trust legally belongs to that trust, not to the beneficiary. So, in the event the beneficiary gets divorced or sued, those assets can be well protected. Additionally, trusts can take advantage of the generation-skipping tax (GST) exemption. The executor of the parents' estates can apply their GST exemption to the trust so that the assets will not be taxed when they are distributed or passed to grandchildren - even if their child is a beneficiary of the trust. In other words, a client could be the beneficiary of a trust created by his or her parents, and the trust will be protected from creditors and avoid estate tax when the client dies.

Talking about inheritance early on can be helpful on several levels

Another benefit of upstream planning is that it encourages families to start talking about multigenerational wealth, which is typically a sensitive subject. The more money a family has, the more it makes sense to have those conversations, and not only from a tax standpoint. The generation with the wealth might find it meaningful to speak with their succeeding generations about how they earned the money and how they'd like to see the inheritance used.

Don't Want to Leave Money to Your Kids? You'll Probably Change Your Mind With some families, you'll never see the first generation engage in those conversations, either because they think it's a private matter or want to ensure their children and grandchildren are motivated to keep working hard. But for upstream planning to be most effective, one needs to know about the parents' assets to coordinate the estate planning, which might be as simple as adding a few sentences or provisions to the parents' wills or trusts.

Business considerations can also be important

Business considerations can also play a role in upstream planning. Let's say an elderly mother owns a business that one of her sons has run for decades, while his siblings have had little involvement with it. When the mother passes away, that son could want to keep the business, since it represents his career and livelihood, while the other siblings might prefer to sell whatever stakes they inherit. This can lead to complicated discussions about business valuation, compensation and control of the business. Such conversations might be better off occurring before the mother passes away so everyone can express their preferences and perhaps reach an amicable agreement that's put into writing ahead of time. There are also instances of upstream planning where a client is providing financial help to one or more parents. In these situations, we will ask whether they'd like to leave some money for the parents if the client happens to pass away first. It's not uncommon for a client to put aside a given amount in a trust for their parents' health care and support, with the provision that any remaining funds go to the client's children when the parents pass away.

Managing family dynamics makes the conversation easier

With so many potential benefits to upstream planning, the only real con relates to family dynamics and possibly offending parents who believe their estate plans are not their children's business. There may be a risk of coming across as greedy. But remember that we're typically not talking about young people here. It's probably elderly parents with the assets and children who could be near retirement themselves. So, one would hope in that circumstance, they could have a meaningful conversation about finances that benefits all involved.

How to Use Your Estate Plan to Save on Taxes While You're Still Alive! When you get down to it, the money belongs to the first generation, and they can do whatever they want with it, whether that involves planning or including their children in the discussions. But if they want to be as efficient as possible with how their money is passed on and avoid future conflicts among their children, good communication can be very helpful.

Communicating and coordinating are key

In conclusion, when preparing your estate plan, we recommend:Make provisions for your parents if you need to take care of them.If you expect any kind of significant inheritance, talk with your parents so you can possibly coordinate with your own plan. That conversation could be broached by simply saying, "Hey, we're doing some planning now, and it would be helpful to know what your plan is, just to have a sense of that or what interests or rights I might have with any trust that's coming my way." Then it would be up to the parents to say either that they feel it's a private matter and don't want to talk about it, or hopefully that it sounds like a good idea, and their lawyers and financial planners should speak with one another. This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA. Explore More Building Wealth David Handler, J.D.Partner in Trusts & Estates, Kirkland & Ellis David A. Handler is a partner in the Trusts and Estates Practice Group of Kirkland & Ellis LLP. (opens in new tab) He concentrates his practice on trust and estate planning and administration, representing owners of closely held businesses, family offices, principals of private equity and venture capital funds, individuals and families of significant wealth, and establishing and administering private foundations and other charitable organizations.With contributions fromHoward SharfmanSenior Managing Director, NFP Insurance Solutions Latest 4 Ways You Can Take Advantage of a Down Market With markets down for the year, it may seem that all the news is bad. But now could be a good time to make some profitable moves. By Adam Grealish • Published 11 November 22 New, Used or Leased: Is Now the Time to Buy an Electric Vehicle? The Inflation Reduction Act created new tax breaks for electric vehicles. Here's a guide to which EVs count and the best time to buy. By Rivan V. Stinson • Published 11 November 22 You might also like 4 Ways You Can Take Advantage of a Down Market With markets down for the year, it may seem that all the news is bad. But now could be a good time to make some profitable moves. By Adam Grealish • Published 11 November 22 Finding Peace of Mind With Your Retirement Income Even in tough times, you can secure retirement income that lets you maintain your lifestyle, lasts a lifetime, adjusts for life events and leaves a legacy for the kids. By Jerry Golden, Investment Adviser Representative • Published 10 November 22 What to Do When an Unhappy Customer Threatens to Ruin Your Rep Some customers go too far when they feel they haven't been treated well, demanding unreasonable make-goods and even resorting to extortion. An attorney offers some advice. By H. Dennis Beaver, Esq. • Published 10 November 22 Rising Interest Rates Change the Math on Pensions for Some Would-Be Retirees Now is a good time to think about when and if to take a lump sum on your pension and what to do with it. Let's explore the pros and cons. By Michael Aloi, CFP® • Published 9 November 22 Counterattack: Tips for Thwarting a Will Contest From contentious relatives to scam artists, wills are not immune to the threat of a contest. If you have an inkling such a fight could be in your estate's future, here are some ways to limit the risk. By Linda Kotis, Esq. • Last updated 10 November 22 5 Steps to a Stronger Financial Plan It's impossible to be right all the time, but a strong plan and constantly assessing where you are can help you pivot when bad things inevitably happen. By Eric Roberge, Certified Financial Planner (CFP) and Investment Adviser • Published 8 November 22 Safe Harbor 401(k)s Can Help Small-Business Owners Keep Happy Employees Immediate vesting and contributions by the employer regardless of the employee's participation pump up workers. Employers get lower costs and tax benefits. By Mike Piershale, ChFC • Published 8 November 22 5 Survival Tips for the Bear Market It's been a painful year for investors, but focusing on the long term and implementing constructive actions can help weather the turbulence. By Daniel Kern, CFA®, CFP® • Last updated 8 November 22 View More ▸ kiplinger About Us (opens in new tab) Terms and Conditions (opens in new tab) Privacy Policy (opens in new tab) Cookie Policy (opens in new tab) Kiplinger is part of Future plc, an international media group and leading digital publisher. Visit our corporate site.
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