6 Ways to Pass Wealth to Your Heirs

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Providing financial security to your heirs after you're gone is a goal you can reach via multiple routes. Here's a guide to some common options you shouldn't overlook.

1. 401(k)s and IRAs

These investment accounts, which grow tax-free while you're alive, continue that tax-free growth after your beneficiaries inherit them. Certain heirs, such as spouses and people with disabilities, can hold these accounts over their lifetime. Withdrawals from Roth IRAs and Roth 401(k)s are nearly always tax-free.

But watch out: Most heirs not in the above categories have to empty these accounts within 10 years.

2. Taxable accounts

Currently, heirs get a great tax break on investments that have grown in value over time. Let's say that long ago you bought stock for $300 that now trades for $3,000. If you sold it now, you'd owe taxes on $2,700 in capital gains. But if your daughter inherited the stock when it was trading at $3,000 and she sold it at that price, she'd owe zero taxes on the sale.

But watch out: The Biden administration has proposed limiting the amount of investment capital gains free from taxes in this situation. This limit could affect wealthier families.

3. Your home

If you own a home, that residence will typically be the most valuable nonfinancial asset in your estate. Heirs might not have to pay capital gains tax on the home if they sell it.

But watch out: Whoever inherits the home will have to cover large expenses such as upkeep and taxes. If you leave your home to multiple heirs, they may fight over whether to sell it, or feel cheated if only one of them will live there. “Make sure that it's quote, unquote, ‘fair’ for everybody,” says Milwaukee estate attorney Eido Walny. “ ‘Fair’ is in the eye of the beholder.”

4. Term life insurance

This can be a godsend for loved ones who depend on your income or rely on your unpaid caregiving. “You can get a lot of coverage for very little money,” says Kamila Elliott, an Atlanta financial planner. A 53-year-old nonsmoking man, for example, might pay only $1,600 a year for a $500,000 15-year term policy, says Wisconsin insurance adviser Scott Witt.

But watch out: If you buy plain-vanilla term insurance and don't die while the policy is in force, you don't get the money back—though that's not necessarily a bad thing. “You pay for homeowners insurance, but that doesn't mean you want your house to burn down,” Walny says.

5. Whole life insurance

These policies provide not only a guaranteed death benefit for heirs but also a cash-value component you can access for emergencies, long-term care or other needs.

But watch out: Whole life is more expensive than term insurance. And borrowing against your policy can backfire in several costly ways.

6. Annuities

A joint-and-survivor annuity guarantees the survivor (your spouse, perhaps) a steady stream of income for life. Annuities with a death benefit can provide a lump sum for a beneficiary.

But watch out: While you're alive, annual fees for variable annuities can be high, limiting potential returns; also, cashing in your annuity for a lump sum may be expensive or impossible.

Bonus tip

Discuss estate plans with your children sooner rather than later, especially if you are leaving them different amounts or giving a large sum to charity. “This is your time to explain the why,” Elliott says.

Sharon Waters, a former CPA, has written for Wired.com and other publications.

Also of Interest

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• How to be a good executor of a will or estate
• Split assets without dividing siblings