Inheritance, Simplified: How Assets Are Passed Down

An older woman signs paperwork, only her hands showing.

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published 25 October 2024

The concept of an inheritance is well known — but "inheritance," as defined by the average person and by the law, can often be two very different things.

Specializing in trust services, I’ve crafted estate-planning solutions for countless clients. A particular highlight for me is working with them on understanding the fundamental intricacies of inheritance. Let’s explore the process of passing on assets.

Why estate planning matters

Estate planning is the process of arranging for the transfer of your wealth in a way that minimizes legal complexities, taxes and costs.

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Without a proper estate plan, your assets may not be distributed according to your wishes. In addition to tax inefficiencies, you could inadvertently burden your loved ones with untold legal complexities after you pass.

However, as mentioned, there are some key differences between what most people consider estate planning, and how the legal system actually handles the transfer of assets after death.

'Inheritance' might not mean what you think it does

Colloquially, we use the word “inheritance” to refer to any money received from a relative who passed away. You may “inherit” money by being designated a beneficiary in their will, trust, 401(k), brokerage account and other types of assets.

However, from a strict legal perspective, “inheritance” — and the corresponding word “heir” — refers to the wealth transfer that occurs when a person dies without any estate plan in place at all.

Each state has these default inheritance laws, called “intestate” statutes, that define the default recipients (“heirs”) of a person’s wealth. While it’s generally true that a person’s heirs are their spouse and living descendants, states vary in how they treat spouses when there are minor descendants or descendants from a prior relationship.

Additionally, states divide estates among descendants using different methods. Some, like Maryland, divide equally at the children’s level (called “per stirpes”), while others, like Virginia, divide at the closest living generation (called “modified per stirpes” or “modern per stirpes”). This impacts how grandchildren inherit when their parents are deceased.

Even if you have a will in place, it’s important to understand the intricacies of your state’s intestate laws. They can drastically affect the distribution of assets if your estate plan is incomplete or contested.

What is the probate process?

“Probate” refers to the legal process of validating and administering a deceased person’s estate. Traditionally, probate involves proving that a will is valid and appointing an executor. Today, “probate” more broadly refers to the court-supervised administration of the entire estate.

For those without a will, probate involves following intestate laws to appoint an administrator and distribute assets. But whether there is a will or not, probate can be confusing, time-consuming and expensive.

To avoid the complexities of probate, many choose to use a revocable trust to pass on wealth instead of a will. However, it’s important to understand that simply creating a trust does not eliminate the probate process. You must also "fund" your trust by transferring all appropriate assets into it while you're alive. If you die before funding your trust, those assets will need to go through probate.

In the United States, there are several different types of taxes imposed on the transfer of wealth. The federal government imposes the following:

A gift tax on transfers made while alive
An estate tax (sometimes called a “death tax”) on transfers made at death
A generation-skipping transfer tax on transfers made to a person who would be a generation younger than your children’s generation

These federally imposed transfer taxes are applied to a person's entire net worth, including everything from real estate to life insurance death benefits. These come with an exemption of $13.61 million for transfers to non-spouses (as of 2024) — spouses are afforded an unlimited marital deduction against transfer taxes.

While most states do not separately impose their own estate taxes, a handful of states do. The state estate tax rates and exemptions vary widely, so check with your estate planner if you have any questions.

Working with an experienced estate adviser

On that note, I cannot emphasize enough the importance of working with an experienced estate planner. They can help navigate the complexities of probate, ensure that your estate plan is properly structured, and provide guidance on how to pass on your legacy effectively.

Beyond the monetary benefits, partnering with a professional can help make sure your plan stays up to date, helping your assets go where you want them to — no matter the changing details of your financial life.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

With 20 years of experience in trusts and estates, David has helped create numerous innovative solutions for modern estate planning challenges. As an attorney, he designed trusts to meet unique circumstances and advised fiduciaries on the high standards required of them, litigating when necessary to redress fiduciary breaches or resolve drafting ambiguities. As the leading executive for Wealth Enhancement Trust Services, David ensures that his team is well-equipped to administer the complex (and simple) cases entrusted to them with compassion and experience.