Inheriting wealth can be unexpected or something you’ve known about for a long time. Either way, it can be life changing. Beyond the emotional component, your head may be spinning with questions about what to do next. How will this change my life? Will this change my life? Beyond the technical components of inherited wealth, receiving a large gift can spark a lot of existential questions that are important to address within the context of your financial plan.
According to the Bureau of Labor Statistics, inheriting wealth have historically accounted for between 20% and 50% of total household wealth accumulation in the U.S. The greatest generation of wealth transfer from the baby boomers is just underway. Despite these statistics, 78% of respondents in a recent U.S. Trust survey of high‐net‐worth individuals feel that the next generation is not financially responsible enough to handle receiving an inheritance. As such, if you are lucky enough to be a part of this significant wealth transfer, we suggest you take the time to carefully plan for how you will use it.
1. Take time before making financial or life decisions, especially if you’re inheriting a significant amount
Take a step back and think about whether or not this changes your life goals and/or trajectory. Before making decisions, check in with your financial and legal advisors who will help you think through long‐term consequences such as potential tax implications. This is especially important if you’re dealing with emotional distress alongside receiving the inheritance. Respect the mourning process and allow yourself time to clear your head so that you can be thoughtful with any financial and life decisions.
2. Consider how the assets will change your future
Once you’ve had time for a deep breath and to process your emotions, you will want to spend some time on your own or with the help of a financial planning professional to work through the potential uses of your inheritance. The impact of a sudden increase in wealth on your life will be unique to you as will the decisions you make, but there are some common questions you will want to consider.
- Do you have debt?
If so, what interest rate are you paying on the debt? If you have any high-interest loans such as credit card bills, paying them off should be a high priority. Paying down low-interest debt such as a student loan or home mortgage is also an option, but you will want to compare potential investment returns relative to the cost of these loans. Your age and risk tolerance will play into this decision as well.
- Are there major changes you would like to make in your life that weren’t possible before you inherited this wealth?
These life decisions may include your career, your education, where you live or even raising children. You will
want to prioritize any major life changes and consider the cost and benefit of making them.
- Is there a cause that you’ve always wanted to support or that you know your benefactor would appreciate?
If so, you may want to think about gifting some of your inheritance over time to charitable causes. A financial advisor can help you determine the best way to make this work to your benefit. Depending on the size of the gift, a charitable trust may be an option.
You’ll want to think beyond your immediate needs and invest a portion of the assets to work for your future. If you need regular income, you may want to plan for monthly or annual withdrawals. Otherwise, you can use the assets to plan for retirement or to enhance your life along the way.
- Did your inheritance come from a family member?
If so, you may want to think about growing a portion of the assets to pay it forward to the next generation. According to the Williams Group Wealth Consultancy, 70% of wealthy families lose their wealth by the second generation. If someone worked hard to pass this wealth along to you, it may give you peace of mind to honor the gift and their legacy by passing something down to your kids and grandkids.
3. Think about Titling of Assets
If you inherited taxable assets and are married, you will want to protect yourself by keeping them in your name until you have time to visit with an estate planning attorney to create your own estate plan. No matter the amount of inheritance, it’s important to revisit your own intentions for your assets should something happen to you. An estate planning attorney will help you get your affairs in order, starting with updating your account titles and beneficiaries on retirement assets.
4. Don’t forget Taxes
Depending on the size of your benefactor’s estate, you may not receive the full amount you expected. State and federal estate taxes must be paid. If illiquid assets are involved, they may need to be liquidated to pay the tax. In addition, if you are inheriting a Traditional IRA, you’ll need to take annual required minimum distributions (RMD), which will be taxed to you as income.
5. Spend Thoughtfully
If your inheritance is a potential major shift in your life, it’s understandable to overestimate the impact and indulge in a shopping spree or two. Stay grounded and make sure you’ve thoughtfully worked through your financial plan so that you don’t adjust your lifestyle so much that you end up in a worse situation than where you began.
Take a deep breath. Rely on the professionals around you to help you think through the financial, legal, and emotional impacts an inheritance will have on your life so that you can honor the gift you’ve received.
