Inheriting wealth can be a sticky business. What happens if someone misuses their inheritance? What happens if they don’t? How much can you leave your beneficiaries without paying an estate tax? And why shouldn't you spend your children's inheritance — after all, you earned it?

Despite such questions, 72% of Americans expect to pass on at least some of their wealth through their estate. Parents and grandparents often see it as a way to show their love and help ease their families through life.

If you are considering leaving your assets or business to your children or grandchildren, you may want to take steps now to help pass on your legacy. .. Let's look at the truth of inheritances, some of the challenges you may face, and your legacy planning options.

The Truth About Inherited Wealth in America

The average U.S. inheritance is reported to be $46,200, which can be somewhat misleading. According to finance journalist Eric Reed, most people who inherit substantial wealth are in the top 1%, and half of Americans who inherit money will actually receive less than $10,000. 

People likely to inherit the most are typically between the ages of 56 and 65. White Americans tend to inherit more than Black or Hispanic Americans. More than half of the people who receive an inheritance tell surveyors they are still trying to figure out what to do with it.

Despite many inheritors' uncertainties, wealth is about to shift from generation to generation. More Americans are set to inherit money as the Baby Boomer middle class starts to leave its wealth behind. In the next two decades, it’s estimated that $84.4 trillion will move from Silent and Baby Boom generations to their heirs. 

However, the statistics are a bit more grim when examining the legacy of family-owned businesses. Reports indicate that most of these companies last just 24 years. Only 40% become second-generation businesses, 13% make it to the third generation, and 3% survive to the fourth generation.

Is leaving your money or business to your kids really a good idea?

Estate and Business Succession Challenges 

Leaving your children an inheritance sounds thrilling, but many people have serious reservations. For instance, some people fear that leaving money to their heirs will create a sense of entitlement, their children will squander their savings, or even they'll intensify the rivalry between family members.

These fears are not unfounded. Free money can be a curse, not always a blessing. In one survey, nearly 67% of high-net-worth individuals feared leaving their children an inheritance. But preparing ahead of time can go a long way to leaving a lasting financial legacy for your family. 

Talk with an estate planning attorney, a business broker, and a wealth management professional to help ensure a smooth transition of your business and assets to the next generation. These professionals can help you identify the financial and legal implications of transferring assets and managing succession. Working with a seasoned team can be especially important if you share business ownership with another family member. 

Mitigating Taxes and Fees

Many Americans believe the exaggeration that any inheritance they leave will get eaten up in taxes. They figure if the government gets the money, why leave it to your family? 

The truth is that inheritance taxes apply to just two out of every 1,000 estates, according to the U.S. Congress Joint Committee on Taxation. Those estates that do have to pay taxes usually have to spend about 17% of their total value, according to the Tax Policy Center. Almost no inheritors of small businesses or family farms have to pay estate taxes, according to the Center on Budget and Policy Priorities. 

Unless you plan to leave more than $12.92 million behind or $25.84 million for a married couple, your heirs won't owe Uncle Sam a penny in estate taxes. This number is due to change at the end of 2025, returning to an estimated $5-7 million per individual. A few states charge inheritance taxes, so you should check with your wealth management professional, attorney, or tax advisor about ways to help minimize these costs if they apply to you. 

Ensuring Financial Literacy

Equipping your children and grandchildren with financial education and skills is critical to helping make sure your legacy lasts. Not only should your children know how to save, spend, give, and invest money wisely, but you likely also want them to understand the importance of financial literacy for future generations in preserving and growing wealth. Your kids will need to teach their kids about money.

One of the easiest ways to do this is to lead by example. Your children watch how you use and spend money. Find ways to talk about money and share what you've learned. You could organize regular family meetings and financial workshops to educate your children and grandchildren about managing wealth, investments, and business operations. Emphasize the importance of continued financial education in preserving family wealth and promoting responsible stewardship.

You can start when your kids are young and use age-appropriate tools to develop a strong foundation. As children get older, you can share more and more about your family's finances, values, and beliefs regarding money. You can even see what they do with a gift of $10,000. People who are wise with small amounts of money tend to be responsible with large amounts. 

Family Harmony and Governance

Inheritances can cause family conflicts. Old rivalries get complicated by grief, and the complex nature of step-family relationships can create problems. Ultimately, you don't just want everyone to get along. Your goal, while not always achievable, should be a sense of unity, shared purpose, and a long-term vision within the family.

Now is the time to establish clear guidelines and a governance structure to prevent family conflicts. Often, it can be as simple as drafting a will, establishing a trust, and telling your family about your plans while everyone is still healthy and sharp. 

How to Establish a Comprehensive Estate Plan and Business Succession Strategy

If you own a family business or farm, engage with estate planning professionals to create a well-defined business succession plan. Through these arrangements, your team can help you evaluate the financial implications and potential value transfer.

Value Your Estate or Business

Do you know how much your personal estate or business is worth? A surprising number of Americans undervalue their estates because they only consider liquid or easily liquidable assets. They forget about real estate, tangible items, and businesses. Your estate planning attorney should help you think through what you actually have to leave behind.

Appraising your business might be slightly more complicated. Is it worth the book value? The value of the physical assets? The discounted cash flow? Without your presence, will the business hold its value? A business broker or appraiser, or industry standards can help answer these questions. 

Once you know the value of your estate and your net worth, you can think about how to best to distribute it and who should receive which assets.

Develop a Family Constitution and Communication Protocol

You can create a family constitution that outlines values, objectives, and guidelines for decision-making within the family and the business. Discussing these topics can be imperative if you leave behind a company that employs people outside the family. These folks need to sense the continuity of culture when leadership changes.

Work to foster a sense of unity and shared purpose by involving family members in discussions about your legacy and the family's role in it. When people feel part of something bigger than themselves, they tend to behave with a greater sense of responsibility.

Should You Consider a Trust?

Tools like family limited partnerships, trusts, or inheritance protection trusts are popular for transferring wealth. 

A trust is a legal entity that holds and manages assets for the benefit of one or more individuals or organizations, known as beneficiaries. It involves three key parties: the grantor, who creates the trust and contributes assets; and the trustee, who in some cases is the same individual as the grantor. is responsible for managing the assets and adhering to the trust's terms; and the beneficiaries, who receive the trust benefits. 

Trusts are established through a legal document called a trust agreement, specifying the trust's purpose, distribution rules, and the trustee's powers and responsibilities. They can be helpful in a diverse range of individuals and circumstances, including:

• Parents: Trusts are often created to provide for minor children in the event of their parents' death or incapacity. The trust ensures assets are managed and distributed according to the parents' wishes.

• Estate Planning: People with substantial assets use trusts to minimize estate taxes and avoid probate. Revocable living trusts are particularly popular for this purpose.

• Asset Protection: Individuals concerned about potential creditors, lawsuits, or divorces may establish irrevocable trusts to shield their assets. 

• Charitable Giving: Individuals can create charitable trusts to donate assets to a nonprofit organization while receiving tax benefits and income during their lifetime.

• Special Needs Individuals: Trusts ensure the financial well-being of people with disabilities without jeopardizing their eligibility for government benefits.

• Business Succession: Trusts can facilitate the smooth transfer of business ownership, allowing for seamless transitions between generations or partners.

• Privacy: Trusts can maintain the confidentiality of asset distribution, as they do not go through public probate, unlike wills.

Trusts offer a versatile and valuable tool for managing, protecting, and distributing assets in various personal, financial, and business scenarios. Their flexibility, potential tax advantages, and ability to bypass probate make them popular for individuals and families seeking to achieve specific financial and personal goals while maintaining control and privacy over their assets.

Consult your wealth management advisor, attorney, and tax planner to determine if a trust is right for you. By working with a team of professionals, you'll be able to address challenges associated with estate planning

If you want to talk about your financial plan and how your legacy, estate plan, or business transfer may impact it, call us today. We'd love to speak with you.