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3 issues that may arise after receiving a large inheritance

Aug 1, 2023 | Estate Planning |

For the typical Washington testator putting together an estate plan, the main goal will be to leave enough resources for loved ones and dependents to ensure their financial stability and comfort in the future. Therefore, people often seek to maximize the value of assets passed on to the next generation of their family and to set aside specific resources for specific beneficiaries that have personal or emotional significance.

Although it is common for people to imagine the pleasant surprise a beneficiary might experience when learning about their inheritance or making use of it in the future, people are less likely to consider the potentially negative consequences of receiving a lump-sum inheritance. The following are some of the risks that a testator can possibly address by carefully structuring what they leave for children and other beneficiaries when considering leaving large gifts behind.

Financial mismanagement

One of the biggest concerns related to a one-time inheritance is the possibility that someone will frivolously waste those resources. It is actually quite common for even responsible adults to mismanage inherited resources and spend them on unnecessary and even meaningless purchases. Testators may want to consider using a trust to limit someone’s access to certain assets or how much they can liquidate at one time.

Tax liability

Washington does impose an estate tax, although it is the estate itself that is responsible for making those payments. The state does not collect an inheritance tax from beneficiaries. However, there are other taxes that a beneficiary might be responsible for paying. Capital gains taxes could consume a significant portion of what someone inherits if they sell resources like real estate after receiving them from the estate. Testators may need to add very specific terms to their estate planning paperwork to minimize the risk of taxes and facilitate the low-cost transfer of their most valuable assets.

Divorce and a loss of assets

Typically, property inherited by one person during a marriage is their separate property. However, many individuals who receive a large windfall will deposit resources into shared bank accounts or give a spouse full access to their inheritance. Doing so means that those assets may be at risk in the future if they divorce. Therefore, testators may have to consider the risk of a loved one divorcing in the future. By putting together a very thorough estate plan, possibly using a trust, a testator can reduce the likelihood of commingling and the challenges that it would cause should one of the beneficiaries of the estate eventually divorce.

Acknowledging the circumstances in which a large inheritance could end up causing problems for beneficiaries may help individuals to craft more effective and beneficial estate plans and to be inspired to seek any legal guidance they may need in order to accomplish this consequential aim.