A survey by Investec Wealth and Investment found that, on average, older people overestimate the time they will spend in a care home to be five years, when in reality the average is two and a half years.
It also found that almost a third of over-55s believe they will need long-term care later in life.
Investec said that, at an average of £28,000 a year, residential care bills reach a total cost of around £70,000, just a quarter of the average inheritance of £282,000.
Nick Gartland, senior financial planning director at Investec Wealth and Investment, said: “Many older people fail to have an inheritance strategy in place and as a result their estate becomes unnecessarily exposed to inheritance tax, which currently stands at 40%.
“Inheritance planning can be a difficult subject to address and there is a tendency to ignore it until it is too late. One of the reasons families defer making decisions on an inheritance tax strategy is the perfectly reasonable concern about running out of money.
“In order to make these decisions it is important they’re fully informed about likely and realistic costs.”
Investec said that one in six people expect to leave over £325,000 to the next generation, leaving them vulnerable to inheritance tax.
In March, prime minister David Cameron announced his intention to increase the inheritance tax threshold to £1m from £325,000.
At the time, Cameron said: “inheritance tax should only be paid for by the rich. It shouldn’t be paid for by people who have worked hard and saved, and bought a family house.”
But the proposals were met with cynicism, with many pointing out that in reality their implementation was unlikely.
Click here to see the expert reactions to the inheritance tax reforms proposed by the PM
