Leaving an inheritance is about more than transferring wealth. With thoughtful planning, you can help maximize the value of what you leave behind and simplify the process for your loved ones.

In this week’s Money Wisdom Question Series, Heath Grossman, CFP® explains how to responsibly and effectively leave an inheritance, both from a financial and legacy perspective.

Assess the Tax Impact

When heirs inherit investments, real estate, or other property, the asset’s tax value often resets. This means they may owe little or no capital gains tax on growth that occurred during the original owner’s lifetime.

Retirement accounts typically require additional tax planning. Under current rules, many non-spouse beneficiaries must withdraw inherited retirement assets within 10 years. However, different distribution rules apply if the beneficiary is less than 10 years younger than the original account owner.

Inherited Roth IRA distributions are generally tax-free, while inherited traditional IRA withdrawals typically count as ordinary income. Because of this, you may consider Roth conversions to help reduce the overall tax burden on your heirs. Leaving assets to a qualified charity is generally a tax-free transaction as well.

Consider Trust Planning

Trusts can generally help your estate avoid probate, streamlining the transfer of assets to your beneficiaries. Other strategies, such as joint ownership arrangements and properly designated beneficiaries, can also bypass probate.

In addition to avoiding probate, trust planning may allow you to control how and when heirs receive your assets. This added level of oversight can help ensure your loved ones manage their inheritance responsibly.

Keep Beneficiary Designations Up to Date

Beneficiary designations typically override the instructions in a will. Any contradictions can create conflict, possibly leading to legal disputes among your heirs. Therefore, it’s important that these designations align with your overall estate plan. Make sure to review your account beneficiaries whenever major life events occur or you make changes to your estate strategy.

Communicate Your Wishes and Values

Sharing your plans with family members can help prevent confusion and potential disagreements. This can also be an opportunity to prepare your heirs for the responsibilities that come with managing an inheritance. Passing along your financial values and life lessons can be a meaningful way to leave a lasting legacy.