Have You Given Your Heirs Adequate Instructions for What to Do When They Inherit Your Assets?
One of the most vital steps in estate planning is correctly designating beneficiaries for your assets. These designations often override what’s written in your will, meaning they dictate who receives funds from retirement accounts, life insurance policies, and certain financial accounts. And planning for the eventual transfer of your wealth to your heirs is an essential part of ensuring your financial legacy is handled according to your intentions.
However, many individuals place an inordinate share of their focus on accumulating assets and selecting beneficiaries, without fully equipping their heirs with clear guidance on how to manage the assets once they inherit them. Missteps—such as misunderstanding tax obligations or ignoring the nuances of retirement account rules—can lead to a significant erosion of the overall gift you intended to leave for your loved ones.
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This lack of preparation can be particularly damaging when the inheritance arrives in the form of complex assets such as retirement accounts, investment portfolios with illiquid holdings, or real estate. Without proper context or education, adult children may face a steep learning curve.
For example, an inherited IRA carries required minimum distribution rules that, if mishandled, can lead to unexpected tax bills. Likewise, selling a property or highly appreciated stock without understanding the basis step-up rules and reporting requirements may result in paying more in taxes than necessary.
That said, this issue is not purely financial. There is a psychological impact of sudden wealth that cannot be overstated. Adult children who inherit large sums often find themselves wrestling with guilt, uncertainty, and pressure to preserve the inheritance exactly as is—assuming that’s what their parents would have wanted. In the absence of clear instructions or open communication, they may default to inaction—or worse, impulsive spending.
Statistically, the outlook for sudden wealth recipients is grim. Research consistently shows that a large share of individuals who receive an inheritance, particularly those who come into it unexpectedly, tend to deplete those funds within just two years. In the absence of financial literacy, spending controls, or legal provisions like trusts that restrict access to the full inheritance until specific milestones are achieved, recipients often make emotionally driven or ill-informed decisions.
This is where the role of the parent transforms from mere benefactor to financial mentor. By having candid conversations about the purpose of wealth and the responsibilities that come with it, parents can instill a stewardship mindset in their next generation. This might include discussing family values around money, outlining expectations for how the inheritance might be used—such as paying off debt, investing in education, or purchasing a home—and offering guidance on how to sift through the noise online and find quality information and resources.
In some cases, a “test run” can be an effective strategy. Providing smaller gifts during one’s lifetime allows parents to observe how their children handle money and offer real-time guidance. By creating a “living inheritance”, this approach not only offers practical financial support when it's most needed but also acts as a tool to prepare heirs emotionally and intellectually for the full responsibility that will come later.
Estate planning tools such as revocable living trusts can also be tailored to include staged distributions or stipulations for how and when funds are accessed. However, these mechanisms should never be seen as a substitute for open dialogue. Even the most meticulously structured trust is limited in its ability to convey your intentions or values unless supported by a conversation that humanizes the wealth transfer.
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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.
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