The surprising dangers of a lump-sum inheritance

| Oct 13, 2020 | Estate Planning

If you have spent a lifetime saving and investing carefully to leave something behind for the people you love, you intend your legacy to be a positive thing. Many testators think that bigger is always better when it comes to what they leave to their heirs.

Unfortunately, an inheritance can be a mixed blessing for some situations. Quite a few people struggle with the pressure of receiving a large inheritance all at once. Other people will experience complications related to taxes, state benefits or personal lifestyle choices that could undermine the positive benefits of that person’s inheritance.

While planning your estate, it’s important to consider whether or not your family might struggle because of what you want to leave for them.

A large inheritance can mean losing out on critical support

Does your spouse require Medicaid benefits in order to cover the cost of their assisted living facility? Does your child with special needs use state benefits to cover medical expenses, housing or school costs? A large inheritance could easily mean losing out not only on a single year’s worth of benefits but possibly multiple years’ worth of critical government support.

Lump-sum inheritances can feed the demons of some people

Everyone has their own unique struggles, but for some people, their personal problems can quickly blow out of proportion when given access to a large amount of money. If you have a loved one who has a history of addictive behavior, frivolous spending or gambling, they could take what you leave for them and waste it all on their worst impulses while they grieve your loss.

Your kids may stop trying because they know they’ll have money one day

Looking forward to an inheritance can drastically impact how responsible and hard-working your children are. Some people with significant assets choose to disinherit their children or significantly limit what they receive to help inspire them to keep working on their own. 

A large inheritance could have tax implications

Depending on the overall value of your estate and the states that your various beneficiaries live in, there could be federal estate taxes to consider, as well as state inheritance taxes that could impact what your loved ones actually receive. In particularly large estates, the total amount of tax could be as high as 40%.

Other risks for large inheritances include getting targeted by swindlers or financial abusers. Careful planning, such as the creation of a trust or decreasing small gifts while you are still alive, can reduce the dangers of a large estate and give you more control over the impact your legacy has on your family.