The Great American Wealth Transfer is under way. Baby boomers expect to transfer more than $30 trillion to their heirs over the next several decades. Some of you may intend to leave an inheritance to a family member or might be fortunate enough to receive one. Receiving an inheritance─whether it consists of assets or cash─may be a blessing. However, if mishandled, it can feel more like a curse.
Evidence suggests that many beneficiaries are ill-prepared to handle an inheritance, and one-third will squander or waste it. People often spend their inheritance on a fancy car or vacation, use it as a reason to quit a job, invest it unwisely, or give the money away to other family members.
What to do When You Receive an Inheritance
The most important thing you can do when you receive an inheritance is to take your time. Take time to grieve your loss. Think before you act or spend. You may receive the inheritance in cash or investment vehicles. Let the assets sit for a time until you can evaluate your situation. Do not rush into decisions that are not thought-out in accordance with your personal and financial goals and ethics.
Once you have come to grips with your loss, figure out where you stand financially. Make sure you understand what you have inherited. Are there specific rules you need to follow based on the types of assets you received?
Consider how you want to honor the legacy of the account owner. How was this wealth accumulated? How would they want you to handle the assets? What values do you share with them?
Tips for Managing Your Inheritance
An inheritance of assets or money is intended to help you improve your life. Sit back and reflect on where you are and identify your short-term and long-term financial and personal goals.
Receiving an inheritance is one of the main reasons people seek the help of a financial planner who can assist with this process. Seemingly simple decisions can have long-lasting financial and tax consequences. Surround yourself with a sound team of experts—a CERTIFIED FINANCIAL PLANNERprofessional (CFP®), certified public accountant (CPA), and an estate planning attorney—for professional advice about how to achieve your goals.
A CERTIFIED FINANCIAL PLANNER™ professional can develop a comprehensive financial plan to help guide your decisionmaking. The plan should acknowledge your priorities, which might include eliminating or reducing credit card debt or student loans, funding your retirement, saving for your child’s college education or a new home, fulfilling charitable goals, and of course, having fun. It should also include a balance sheet listing your assets and liabilities and a budget showing your income and expenses.
Tips for Managing Inherited Cash and Investments
If you inherit cash or investments, your options are simple: spend it, save or invest it, or gift it. Some combination of all three is a nice balance to achieve. You may also inherit assets that are not appropriate for your situation.
Having a financial plan in place and knowing your priorities will help you decide how to proceed. Once you have established your goals and how to achieve them, reallocate the portfolio appropriately, and be sure to set aside funds for a fun purchase or to gift to family members or your favorite charity.
Tips for Managing Inherited Retirement Accounts
If you are a spouse, you can retitle retirement assets in your name or take an immediate payout. Often, keeping the accounts and transferring ownership to your name is best, as it maintains the income tax stretch provisions of the retirement account.
The SECURE Act, passed in December 2019, changed the rules for non-spouse beneficiaries who inherit a retirement account. The beneficiary no longer gets the benefit of stretching the IRA over their lifetime. They now have to withdraw the full amount of the retirement account within ten years after the year of the date of death. In other words, if the date of death is 1/1/20, a non-spouse beneficiary has until 12/31/2031 to take the full balance. We recommend working with a financial advisor to develop a plan for how to tax efficiently withdraw these funds from the retirement accounts.
Tips for Managing an Inherited House or Property
If you inherit a house or property, your options are to sell it, rent it, or live in it (part-time or full-time).
Selling the home will provide funds to add to your nest egg for fulfilling your goals, such as retirement or paying off your mortgage. Renting the house will generate an income stream, which could help you cover expenses in retirement or add to savings. Of course, there are risks and costs associated with being a landlord that you should consider.
It’s also possible you could inherit a vacation home that has been left to multiple family members, such as siblings or extended family members. Be prepared to address many issues that tend to arise with multiple owner homes. At the outset, here are some questions you should discuss with the other owners:
- How will the families share the costs for monthly expenses (such as utilities)? It’s not uncommon for a family to argue that if they spend less time at the home, they shouldn’t have to pay as much as another member.
- How will decisions regarding renovations and repairs be handled? You may think the pier at the lakehouse needs repair, but your sibling may think it’s an unnecessary expense.
- How will families decide who gets to use the house when? Vacation homes can be seasonal (a house at the beach will be in demand in the summer, while a house in the mountains will be particularly popular in the winter months, for example). How will you ensure that every family gets to enjoy the best of what the home has to offer?
- What happens if someone wants to sell? If one owner wishes to sell the property and another wants to enjoy the home, how will you resolve it?
These types of issues can tear a family apart. Having a trusted financial team in place can help you navigate these issues and more. At EKS Associates, we offer our clients family wealth planning solutions that include facilitating family wealth planning meetings to help safeguard the success of future generations.
Tips for Managing Inherited Jewelry and Other Assets
Other assets that are often inherited include things like jewelry, art, cars, and collections. If you inherit these types of assets, you first have to decide if you want them and whether there are sentimental reasons to keep them. If you choose to keep them, make sure they are properly appraised and insured. If you decide there is no benefit to keeping them, consider hosting an estate sale, or donating the assets to a reputable charity.
Whether you inherit a little money, a single valuable asset, or a small fortune, take your time before deciding how to handle the inheritance. Consider all of your options and their implications, consult with your trusted advisors, and then do what is best for you and your family.