Estate Plan Essentials

What should advisers understand about the patterns of inheritance, and how can they be prepared to help their clients make the most of any windfall?

Art by Franco Zacharzewski

Inheritances require more planning than one might imagine.

A recent white paper from Capital One says that over the past 30 years, 20% of households have received an inheritance and that in the coming decades, that will continue as Baby Boomers transfer their wealth to Generation X and Millennials.

In 2016, the average inheritance was a sizeable $295,000. Over the next 30 years, it is projected that retirees will transfer more than $36 trillion to their families, charities and other beneficiaries.

Given that this is such a sizeable amount of money, PLANADVISER decided to ask retirement plan advisers how they counsel clients who receive an inheritance—and how recipients actually handle the payments. Does the money often go toward retirement savings, or do clients put the payments toward more short-term financial goals? 

Start with a plan

First and foremost, advisers say, it is foolhardy to count on an inheritance as the cornerstone of one’s retirement strategy. Not only might the inheritance never come for any number of reasons—from a simple change in plans to a serious rift in the family—it’s also possible that a recipient will be irresponsible with the money, having never build a long-term financial plan.

One constructive step advisers can take immediately is to encourage their clients to have a will, says Michael Roberts, president of Arden Trust Company.

“Two years ago, BMO Harris Bank surveyed families with regard to estate plans,” Roberts says. “It revealed several disturbing statistics. Over half of the people did not have a will in place, no formal estate plan to start with.”

According to Roberts, the most interesting statistic was that only 28% of parents had shared details of their estate plans with their children. This was later confirmed by another survey of high-net-worth individuals by U.S. Trust Wealth Management, which found only 64% had had any discussion at all with family members about their estate plans.

A natural second step is to encourage parents to discuss their plans with their family, Roberts continues.

“The U.S. Trust survey also revealed that there are often disruptions in families when there is an inheritance,” Roberts says. “Forty percent of children feel that the inheritance was unfair. This stems from a lack of communication. I often see this in my business.”

Communication and transparency

Brett Tharp, senior financial planning analyst and certified financial planner at eMoney Advisor, also says communication and transparency are key when it comes to setting up an estate plan: “Financial advisers can help guide clients to create an estate plan that will be communicated to their heirs and allow for more transparency into what an heir will receive.”

However, advisers should keep in mind that there will be clients who do not want to share their plans with their family members, notes Cheryl Heilman, vice president of Bankers Life Securities.

Should an adviser have a client who receives an inheritance, they should keep in mind that “they can make a significant impact” on that life event, says Matthew Schechner, president of Essential Advisory Services. “I do discuss inheritances with my clients. In most cases, those who receive an inheritance have never managed that large of an amount of money. Those are the ones I am really concerned about.”

Schechner says most of the people he advises are wealthy and tend to receive an inheritance. This demographic group, by and large, is responsible with the money. However, there are those who “don’t know where the money should go. They don’t have the breadth of knowledge about taxes.” Here, he says, is where an adviser can play a significant role.

As to what beneficiaries actually do with the money, Schechner says, it depends on their “financial maturity.” He has witnessed reactions “all over the map.”

“If it is a male under the age of 25, they are going to go out and buy a car, which is why a parent might want to consider placing assets in a trust,” he suggests.

Being realistic (and responsible)

While the Capitol One statistics on wealth transfer are impressive, advisers agree that it is pure folly for a person to depend on an inheritance, and even less wise to factor that into their retirement savings projections.

“Relying on an inheritance for retirement is a big mistake,” Roberts says. “Everything might not go as planned. The parents might lose all of their money in a market crash. We have been in an unprecedented bull market. The market could turn and crush one’s worth.”

Then there are long-term health care costs to consider.

“One of the parents could die and the surviving spouse might remarry,” Roberts says. “All of a sudden, there is another family to share the inheritance. The sensible thing is to take personal responsibility for your own future and plan for your own retirement.”

For the most part, people do not make this mistake, says Ken Van Leeuwen, managing director of Van Leeuwen & Company. Only one of his clients ever said, “I am counting on an inheritance from my mother” and was not saving as aggressively as they should be for their retirement.

Tharp says that if a client insists on factoring in an inheritance into their financial plan, it’s best to make a conservative estimate versus an overly aggressive inheritance assumption that drives their current lifestyle.

“It can be tempting to get carried away with the possibilities, but it’s more appropriate to plan for a modest inheritance and revisit the financial plan once the money is received,” Tharp says. “One technique an adviser can use to ensure their client is not overly reliant on the inheritance is to stress test the plan with the assumption that the client receives no inheritance.”

That is probably the best way to go, Heilman agrees, pointing to a 2017 Natixis U.S. Investor Survey that found while 70% of Americans expected an inheritance, only 40% received one. “It is an adviser’s responsibility to be extremely cautious when a client over-relies on an inheritance,” she says. “One of the best things Americans can do is asses their overall financial situation and start planning for retirement early.”