The numbers swirling around the Great Wealth Transfer, which is the transfer of wealth from the Silent Generation through Generation Z, are breathtaking: Cerulli Associates estimates the sum at $124 trillion, with $105 trillion going to heirs and the rest to charity between 2024 and 2048.
 

But inheriting assets is not always straightforward. Beneficiaries may need to do a little work before they can use the funds, and this is where financial professionals can play a role: By understanding options and obligations that come with different assets, you can help clients make informed decisions about money they may inherit or plan to leave behind.

How you can help clients navigate inheriting a 401(k)

A 401(k) is a fairly good example of an asset that requires some forethought because what beneficiaries can do with the account depends on a number of variables, including their relationship to the deceased and their own age.
 

Here are some questions you may be able to help clients explore:
 

1. Can they leave the 401(k) where it is? It depends on the plan and the beneficiary’s relationship to the deceased. Spouses may be able to keep the money in the plan and take distributions based on their anticipated lifespan, but non-spouses may face stricter timelines. You could help them understand the plan’s requirements and their possible next moves.
   
   
2. What should they consider if they want to take a lump-sum payment? Knowing how clients plan to use the money can help guide this decision. While this option can provide immediate access to funds, it may result in a significant tax liability.
   
   
3. Can they roll the money into another account? There are a few things to juggle here, because age, taxes, the beneficiary’s relationship to the account owner, and the plan's rules are just a few factors that determine whether a rollover is allowed and what kind. Spouses may consider rolling the funds into their own 401(k) or into a new or existing Roth IRA or traditional IRA. They can also open what’s known as an inherited IRA or beneficiary IRA. Non-spouses could direct the inherited funds to an inherited traditional or Roth IRA. 

How inherited 401(k)s can kick-start bigger conversations

Helping clients understand their inherited 401(k)s could provide a segue into discussions about other financial assets they may have, how they plan to use them, how those funds are working to help them reach their financial goals and even expand into discussions about financial legacies and what they may want to leave behind. 

How to begin inheritance conversations

It may not be necessary to wait for a client to inherit assets to begin discussions around inheritances and estates. Instead, there are several ways to introduce and frame the conversation.

One option is in a forward-looking discussion that explores whether they have made plans for their assets, such as assigning beneficiaries to savings vehicles like IRAs and bank accounts. You can also encourage them to consider creating a calendar for reviewing account beneficiaries in case things change and explain why this is important.

This same discussion, or a later one, could then talk about financial legacies from a few angles, such as what they want to leave for the next generation, the tax considerations different vehicles offer, and perhaps the pros and cons of letting future beneficiaries know what their financial plans may be.

On-site and online plan sponsor events about generational wealth and legacy planning could be another way to introduce estate planning and options such as gifts that might offer tax and wealth benefits to beneficiaries. Like a one-one-one client discussion, this approach highlights the breadth of your knowledge and investment in clients’ overall financial well-being.

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