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The Best Way to Leave an Inheritance

Joanne Cleaver

You can't take it with you, so you may as well leave it to someone you love. Right?

That's a sentiment most people don't expect to apply in real life, and it has nothing to do with the affection they feel for their families and pet causes.

A survey by British multinational bank HSBC, which considered the views of 16,000 people in 15 countries from July 2012 to April 2013, found that only 42 percent of preretirees expect to leave an inheritance. In the same survey, 56 percent of current retirees surveyed thought their estates would yield assets for loved ones. Sandy Banks, a certified public accountant and financial advisor in Salt Lake City, says historically, estate planning involved ... well, estates.

"Retirement costs are so high and uncertain that most people aren't so sure they are going to have enough to give away," Banks says. "The first thing people ask is, 'Will I have enough to pay my bills for the rest of my life?'" Clients' second priority is estate tax, then projected health care expenses, she says. Leaving a substantial amount of money to extended family has been pushed way down the list of priorities for retirement planning, she explains, with immediate family members always first on the list, followed by charities, churches and causes.

[Read: In Financial Planning, Couples Should Work Together.]

The new inheritance question for retirees and those approaching retirement, Banks and other financial planners say, is whether it is wiser to give would-be heirs money now - partly to ensure the heirs actually get a slice of assets, and partly to give the heirs a chance to achieve their own financial goals. When the urge to be generous is at odds with preretirees' own savings goals, as it often is, secondary factors come into play.

Dennis Sandoval, director of education for the American Academy of Estate Planning Attorneys and an estate lawyer, tells of a client with a net worth of $20 million whose share-the-wealth considerations were similar to families of lesser means.

As he talked through the implications of various trusts and tax plans, the client realized that the real goal for moving a significant slice of assets into a family trust was less about taxes and more about clearing a path for his son to take management of the properties - and allowing him plenty of time to recover from the inevitable mistakes. "The primary goal was to save estate taxes. The second, to get [future property] appreciation out of the estate, and the third was to get his son to carry on the business," Sandoval explains.

[See: 10 Steps for Retiring Entrepreneurs.]

Inheritances shouldn't hurt the people leaving them, Sandoval and Banks say. Those saving for their retirement shouldn't compromise their own investment goals.

But, if you are on track with your own goals and an early inheritance would make a substantive difference to your eventual heirs, here's what Sandoval and Banks say you need to know:

-- You can give up to $14,000 each year (as a married couple, $28,000) to each of as many individuals as you wish, with no tax implications for either you or the recipients. If the gift is an asset, such as stock, tax considerations and capital gain taxes might kick in.

-- There isn't an inheritance tax for couples' estates of under $10.68 million and for individual estates of under $5.34 million. Sandoval explains that this amount can be given before or after death, but not both.

Remember to include off-balance sheet commitments, such as your risk in co-signing for a loan for a mortgage, student or consumer loan. "If you co-sign a mortgage on your son or daughter's first home, that would affect your estate plans. It's not on your radar screen because you're not the primary borrower," explains Michelle Hall, market research manager for Securian Financial Group, an insurance company based in Minnesota. You might need to offset that risk by continuing life insurance or by writing into your will how you may offset any loan payments made for that relative when calculating the amount left to the rest.

[Read: Boomers Need to Talk About Long-Term Care.]

Just as Sandoval's client blended several motivations - his personal financial situation and business continuation - into his plan for transferring ownership of real estate to his son, consider a gradual release of assets through a family limited partnership. Such a partnership, Sandoval says, transfers the ownership, but not control, of assets, to the next generation, letting them ease into their stewardship. Under such an arrangement, the new owners reap income from the assets, such as rental income or earnings on stocks, and are also responsible for taxes on those earnings.

If your estate is worth less than $2 million, chances are that your top priority is not taking care of your heirs, but ensuring you won't outlive your money.

"For the vast majority of people with less than $2 million, they don't have the freedom to give away money now because they need it to survive themselves, or in case of a long-term illness," Sandoval says. "It's really more of a wealth question than a motivational question."

Don't feel bad. When it comes to inheritances, reality doesn't always align with popular culture. According to the HSBC study, 61 percent of preretirees and 76 percent of current retirees report that they never received a significant financial gift from their own parents or a relative.

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