Is Outright Distribution the Perfect Fit for Your Loved Ones?
Although Americans are living longer and spending more time - and money - in retirement,
many parents intend to leave an inheritance to their children. The exact amount can vary greatly
depending on individual circumstances and wealth levels, but even a small inheritance can be
meaningful and help set a child up for long-term financial success, provided they are ready to
handle it, which may not be the case.
Most families fail to discuss wealth transfers to ensure that younger generations are prepared
for an inheritance. Parents need to decide how they want to pass their assets (accounts and
property) to their children and other beneficiaries so they can plan the transfer in a way that fits
their goals and their loved ones' abilities to manage their inheritance. The wealth transfer
process includes deciding whether to leave a loved one an outright inheritance or to pass their
wealth down in a more controlled manner.
Pros and Cons of an Outright Inheritance
Over the next 20 years, an estimated $84 trillion in assets is expected to change hands from
older Americans to younger Americans in what financial experts are calling the "Great Wealth
Transfer."1
According to a USA Today survey, about 76 percent of Americans receiving an inheritance say
they plan to save or invest it, 40 percent say they will use it to pay off debt, and 21 percent want
to leave the money to their children.2
Another survey found that, among those expecting to receive an inheritance, 50 percent
consider it "highly critical" or "critical" to their long-term financial security and retirement.3
The most straightforward way to transfer wealth is by outright distribution. An outright
distribution is fast and simple, and there are typically no fees associated with it. There are also
no strings attached. When a beneficiary receives an outright distribution, they are free to use,
sell, or manage the money and property however they want, with no conditions, restrictions, or
oversight.
However, an outright inheritance may not be in the beneficiaries' best interest. For someone
unprepared to handle an inheritance, not only could the money fail to solve their financial
problems, but it could also worsen them or lead to new ones.
In spite of their best intentions to budget, invest, and responsibly spend an inheritance, your
loved ones could just as easily squander it on impulse purchases, risky investments, or financial
scams.
More than a quarter of respondents admitted to USA Today that they plan to use their
inheritance for travel or luxury spending.4 Many (72 percent), according to a Citizens Bank
survey, also admit that they are unprepared to manage an inheritance.5
One downside of an outright distribution is that if a beneficiary has debt, something many young
people struggle with, a creditor might be able to make a claim against the beneficiary and take
their inheritance even before they can benefit from it.
Certain beneficiaries may not be legally able to receive an outright distribution. If the recipient is
a minor child, for example, or is incapacitated (unable to manage their affairs) and does not
have an agent under a financial power of attorney, a court-appointed conservator may be
necessary to receive and manage their inheritance for them.
Alternatives to Outright Distribution
None of this is to say that outright distributions are inherently bad. Deciding whether to leave an
outright inheritance to a beneficiary depends heavily on their personal situation. Even within the
same family, children can have wildly different financial aptitudes and attitudes. Some are
perfectly capable of managing their inheritance. Others struggle to plan and save for the future.
There can also be a gap between what children plan to do and what they end up doing. Parents
may sometimes need to protect their children from their own bad habits.
No matter how much you plan to leave to a beneficiary, it can be a source of pride and
fulfillment to know you are making a difference in their life. A Northwestern Mutual survey found
that, among those expecting to leave an inheritance, more than two-thirds (68 percent) said it is
their "single most important financial goal" or is "very important."6
However, leaving an inheritance can also be a source of trepidation. Six in 10 parents told
Northwestern Mutual that their children do not value financial responsibility the same way they
do, with more than half expressing concerns that this difference in values could negatively
impact the family's assets when they pass from one generation to the next.7 And only about a
quarter of adults feel prepared for, and confident in, the wealth transfer process, Edward Jones
research found.8
When deciding what method of distribution is best for your child, it helps to know their current
financial situation and their short- and long-term financial goals, such as paying down debt,
buying a home, giving to charity, and saving for education. This knowledge starts with a family
discussion about wealth transfers. We would love to be part of the conversation and answer any
questions you and your family have about inheritance-related matters, such as taxes, ways to
invest and budget an inheritance, and estate planning after an inheritance.
MEREDITH | PC
4325 Windsor Centre Trail
Suite 400
Flower Mound Texas 75028
214-513-1013
This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional Counselors to evaluate or pursue tax, accounting, financial, or legal planning strategies.
You have received this newsletter because I believe you will find its content valuable. Please feel free to Contact Me if you have any questions about this or any matters relating to estate planning.
