The Inheritance Myth
Are You Relying on Inheritance for Retirement?
Today's retirees are one of the wealthiest segments of the American population, owning more wealth than any previous generation. But will bequests from this wealth help baby boomers, the next generation of retirees, bridge the gap between their retirement needs and resources? Unfortunately, the answer is probably no.
Retirement Realities
Current projections estimate that Social Security and Medicare will experience revenue shortfalls in 2014, soon after baby boomers begin retiring. At the same time, with some $10 trillion to be inherited over the next 40 years or so, averaging about $90,000 per person, boomers are expecting the largest intergenerational wealth transfer in history, which many hope will cure their retirement woes.
Unfortunately, the reality is that 80% of baby boomers should not expect to receive an inheritance at all, according to a recent American Association of Retired Persons (AARP) report. Inheritances are most likely not going to bail out insufficient retirement savings or shortages as a result of Social Security and Medicare.
In fact, today's retirees are spending their assets at a much faster rate than their predecessors. Because they are living longer, they will deplete the assets that they would otherwise have bequeathed to their children. According to a Federal Reserve Bank of Cleveland Economy Commentary, although bequests today are larger in absolute terms than they were in the past, they have not grown substantially relative to the inheritors' living standards as reflected by their labor incomes.
Uneven Distribution of Wealth
Part of the gap between projected inheritance estimates and most baby boomers' reality is that a select few Americans continue to inherit the most of the wealth. Inheritances have been, and are projected to remain, very unevenly distributed among the population, making it improbable for most people to receive. Twenty-five percent of inheritances larger than $100,000 go to the wealthiest 20% of Americans. Sixty-five percent of all inheritances are left to families with a net worth of $140,300 or more, according to AARP.
Declining Bequest Trend
But perhaps just as important as longer life spans and an uneven distribution of inheritances, there is also a declining bequest trend. According to The American Enterprise Institute, this is evidenced in an increasing trend toward annuitization or income flows that cease when the recipient dies. Ultimately, this trend also translates into a decrease in the share of inheritable assets.
Post-Boomer Projections
Boomers' kids will likely receive larger inheritances than their parents, partly because baby boomers are having fewer children than their parents did. Therefore, the bequest baby boomers leave for their offspring is likely to be a higher portion of their labor earnings.
Estate Planning Checklist
As this inheritance myth is unraveled, the need for comprehensive retirement planning with a qualified financial advisor becomes more and more evident. As your retirement nears, estate planning is an essential strategy to help protect your family and your wealth.
Review the following estate planning checklist and bring it to your financial advisor and a qualified legal professional to discuss how to make your estate plan comprehensive and up-to-date.
Estate Planning Check List
Part 1 — Communicating Your WishesYes |
No |
Do you have a will? |
| Yes | No | Are you comfortable with the executor(s) and trustee(s) you have selected? |
| Yes | No | Have you executed a living will or health care proxy in the event of catastrophic illness or disability? |
| Yes | No | Have you considered a living trust to avoid probate? |
| Yes | No | If you have a living trust, have you titled your assets in the name of the trust? |
Part 2 — Protecting Your Family
| Yes | No | Does your will name a guardian for your minor children if both you and your spouse are deceased? |
| Yes | No | Have you updated your beneficiary designations on your existing policies? |
| Yes | No | If you want to limit your spouse's flexibility regarding the inheritance, have you created a Q-TIP trust? |
| Yes | No | Are you sure you have the right amount and type of life insurance for survivor income, loan repayment, capital needs and all estate settlement expenses? |
| Yes | No | Have you considered an irrevocable life insurance trust to exclude insurance proceeds from being taxed as part of your estate? |
| Yes | No | Have you considered creating trusts for family gift giving? |
Part 3 — Reducing Your Taxes
| Yes | No | If you are married, are you taking full advantage of the marital deduction? |
| Yes | No | Are both your estate plan and your spouse's plan designed to take advantage of each of your $1 million applicable exclusion amounts? |
| Yes | No | Do you and your spouse individually own enough assets for each of you to qualify for $1 million applicable exclusion amounts? |
| Yes | No | Are you making gifts to family members that take advantage of the $11,000 annual gift tax exclusion? |
| Yes | No | Have you gifted assets with a strong probability of future appreciation to maximize future estate tax savings? |
| Yes | No | Have you considered charitable trusts that could provide you with both estate and income tax benefits? |
Part 4 — Protecting Your Business
| Yes | No | If you own a business, do you have a management succession plan? |
| Yes | No | Do you have a buy/sell agreement for your family business interests? |
| Yes | No | Have you considered a gift program that involves your family owned business, especially in light of "estate freeze" rules? (These rules were enacted by Congress to prevent people from artificially freezing their estate values for tax purposes.) |
These changes are the result of the Economic Growth and Tax Relief Reconciliation Act of 2001. The estate tax exemption will revert to $675,000 as of January 1, 2011, unless Congress renews or changes it.