Should your beneficiaries really inherit the same amount?

On behalf of Peterson Stark Scott posted in on April 19, 2019.

It seems straightforward. If you have three children, shouldn’t they each inherit a third of your assets? Not necessarily. Leaving your beneficiaries the exact same dollar amount without taking into account their tax bracket could short them thousands of dollars in taxes.

What do tax brackets have to do with it?

When beneficiaries inherit from an estate, they also inherit the tax liability. If the beneficiaries are in dramatically different tax brackets, they will be taxed differently and one of them will end up inheriting far less than the others.

Take, for instance, the following example of three beneficiaries who will inherit a combined $600,000 with $400,000 in an IRA portfolio and $200,000 in other taxable assets. There are three children, taxed at 12 percent, 24 percent, and 37 percent.

If each beneficiary receives a third of the overall estate (roughly $66,000 in taxable and $133,000 in tax-deferred assets), then the one who is taxed at a higher rate will receive $50,000 less than the beneficiary in the lowest tax bracket.

How can you make inheritance fair instead of equal?

To minimize potential conflict over inheritance, it is important to have an open conversation with your beneficiaries about finances. If you are aware that your beneficiaries occupy very different tax brackets, you can work with a financial advisor to create a plan that fits their unique situations.

For individuals in higher tax brackets, they could significantly benefit from inheriting taxable assets. Those in lower tax brackets could benefit from inheriting exclusively from IRA-type accounts. Others can benefit from a blend of both.

By maintaining an open and honest conversation with beneficiaries, you can minimize surprises and potential conflicts later. This can be part of your legacy of honesty and careful financial planning.

Leave a comment