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Thinking about leaving an inheritance? How to pass on your wealth

Grandparent and grandchild playing cards

What do you want your legacy to look like after you're gone? While it can feel uncomfortable to think about at first, being proactive about managing your estate can help you live generously in support of the people and causes that matter to you.

Wise stewardship of your resources can provide you with money and other assets that can help you live comfortably in retirement and build the legacy you want to leave behind. But what is the best way to leave money to heirs or pass on your wealth? There's no one way that works for everyone, but learning about the options available to you and considering your values and needs can help you plan ahead.

Infusing values in your financial legacy

It may help you to sit down and consider your values first. Make a point to think through what matters most to you, and ask yourself:

  • How do I want to be remembered?
  • How can my resources build security and comfort for my family as they pursue their own goals and dreams?
  • How can I allocate money to continue the work that mattered most to me?

In many ways, your resources can continue your life's work after you're gone. They can also begin the process of creating generational wealth. Passing along money and other assets to your heirs can give them the freedom to take financial risks, like starting a business, pursuing a creative arts field or spending time in caregiving roles that matter to them.

Managing your estate can help you decide what methods of wealth transfer make the most sense according to your values and financial goals.

What are your options for leaving an inheritance to loved ones?

There is more than one creative way to leave an inheritance to the people you love, and you shouldn't feel boxed into a single path. Knowing your options and what kind of process is involved in using these methods can empower you to save your family extra work during the asset distribution process.

Consider which of these options, or a combination of them, would be the best way to pass on your wealth to match your individual estate strategy.

401(k) and IRA accounts

If you have money in a retirement account, it is possible to name beneficiaries so your heirs can easily inherit those accounts. In some cases, the assets must be withdrawn within 10 years of your death, though there are some situations where beneficiaries can take longer.

Talking to a financial advisor can help you learn how individual retirement accounts (IRAs) and 401(k) accounts could create taxable income for your heirs and how to prepare them for the process.

Real estate and other property

The main conversation to have when leaving assets in the form of property is whether you'd like it to stay in the family or if you don't mind it being sold. A long-term place to live is a valuable way to leave a legacy, but if you expect to leave a single home to multiple heirs, you have to decide how to do so in a way that makes sense for your family.

In many cases, not every heir can live in the home, so they may advocate for selling the home and splitting the proceeds. If you want the home to stay in the family, it's wise to talk through how your heirs feel about that prospect and how everyone can receive the benefits of that home in a fair way.

Life insurance: Term & whole

Life insurance can help your family feel financially secure. These death benefits often may be used to pay down debt, arrange for funeral costs and help grieving family members replace your income. The death benefit is generally income tax-free to your beneficiaries, which may mean a larger benefit for heirs than with taxed forms of inheritance.

Term life insurance offers a death benefit in case you pass away while the coverage is in force. When you stop paying the premiums or the term expires, you no longer have life insurance coverage and premiums you paid are not returned to you. Whole life insurance, on the other hand, is permanent insurance designed to last for your lifetime as long as premiums are paid. It may have a cash value that grows, allowing you to potentially withdraw or borrow from during your lifetime.

Annuities

Annuities are insurance contracts that can provide income in retirement. Annuity beneficiaries are the parties designated to receive any applicable death benefits. When a death benefit is triggered, payments to a beneficiary may depend in part on whether the owner had already begun to receive annuity payments. Inherited annuities are taxable to the beneficiary. The exact tax implications will vary depending on the type of annuity, your tax status and the chosen payout.

Taxable investment accounts

If you have non-retirement investments, those accounts are usually subject to taxes. When you pass them along, taxes generally aren't due immediately, but if the assets have grown, there may be capital gains tax and income tax to pay when your heirs withdraw the money.

Talk to your financial advisor about the implications of keeping assets in a taxable account given its growth over time. You can then help your heirs plan for any tax bills that might come their way.

Consider giving inheritance now

Thinking about the best way to leave money to heirs often leads families to feel grateful for all they have. The feeling of abundance can make you wonder if the best way to pass on wealth is to start right now. Perhaps family members or charitable organizations could put your gift to use immediately.

For this reason, you may decide you want to give monetary gifts now. Talk with your tax and financial advisors about whether your giving will exceed yearly gifting limits since this could require tax reporting and potentially an increased tax payment.

Set your plan in motion with a will and designations

Talking with an estate attorney can help you smooth out the inheritance process. Unclear documentation or a lack of named beneficiaries can create a complex, challenging process while your heirs are grieving. By creating a will and designating beneficiaries for accounts, you can help your loved ones quickly close the estate without ambiguity.

That said, conversations are key, even though talking about your estate can be tough to do. You can share what you've learned about passing on wealth and get insight into what would help your beneficiaries feel confident and comfortable about the process.

Partner with a financial advisor

Financial advisors understand a variety of financial products that pass through inheritance. It's important to work with one who understands your personal story and values to craft plans around the legacy you want to leave.

Connect with a local financial advisor to help find creative ways to leave inheritance dollars to the causes that matter to you and identify the most practical ways to pass wealth on to your heirs.

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Loans and surrenders will decrease the death proceeds and the cash surrender value and may cause the contract to terminate without value. Loans and surrenders may generate an income tax liability. A significant taxable event can occur if a contract terminates with outstanding debt. Dividends may be affected by loans. Loan interest is charged in arrears an annual rate of 8%.

The federal income tax treatment of life insurance is unclear in certain circumstances. A qualified tax advisor should always be consulted with regard to the application of law to individual circumstances. Thrivent does not make any guarantee regarding tax treatment (federal, state or local) of any contract or of any transaction involving a contract, particularly after insured age 100. Life insurance proceeds may be subject to federal and/or state estate and/or inheritance taxes.

Under current tax law [IRC Sec. 101(a)(1)], death proceeds are generally excludable from the beneficiary's gross income. However, death proceeds may be subject to state and federal estate and/or inheritance tax.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Contracts have exclusions, limitations and terms under which the benefits may be reduced, or the contract may be discontinued. For costs and complete details of coverage, contact a licensed insurance agent.


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