You might be grieving the loss of a spouse, parent, or relative who’s recently passed away and left you an inheritance. What do you do with the money? How do you manage it well? If you feel overwhelmed by the responsibility of making smart decisions with the financial wealth you now have, you're not alone. I’ve been there myself and know the challenges and mixed emotions that come with inheriting money from a loved one. It can be difficult. We’re going to explore 7 considerations for how to be a good steward of sudden wealth. By the end of this article, hopefully you can breathe a little easier and feel empowered to move forward with greater confidence.
#1 Keep Things Private and Pause
You might be tempted to tell others about the inheritance you’ve received. We have found that it's typically best to keep your new wealth private at least until you process what it means for you moving forward. Sharing your news openly sometimes sparks the idea in friends and family to ask you for money. Such requests can be challenging to manage. It also might be tempting to spend the inheritance right away. You will have plenty of time for that, so take a moment to get organized and gain clarity about what’s most important to you before making any major decisions about what to do next. If you’ve already splurged a little, it’s okay. Make the effort to be prudent with the rest so that you use it intentionally.
#2 Understand Potential Tax Implications
This is where things start to get a little complicated, so it’s beneficial to start working with your trusted financial professionals—a financial advisor and/or an accountant. Inheritances come to individuals in different ways. Some examples might include real estate, bank accounts, a valuable possession, annuities, life insurance proceeds, taxable investment accounts, or retirement accounts (401k, IRA, etc.). No one wants to lose someone they love and then shortly thereafter receive an unexpected "tax surprise". This is why working with a professional who can help you understand the tax implications of your new uncharted territory is important. As an example, a good advisor could help you see that receiving $5 million in retirement assets such as an IRA is more like receiving an account worth $3.5 million after accounting for the deferred taxes that will need to be paid on those assets over time (assuming a tax rate of 30%). Not to mention there are IRS rules you must follow regarding when an inherited IRA needs to be fully distributed. This is a very different scenario than if you were given $5 million of real estate or a bank account. Additionally, there might be appreciation or gains on the asset you’ve inherited since the date your loved one passed away. You’ll be responsible for taxes on these gains if you’ve sold and realized the gains. If you are a widow or widower, you can use the married filing jointly tax rates for up to two years following the death of your spouse. Afterwards, your tax status changes to single and you'll likely have a higher tax bill to plan around. You will want to get a handle on your tax situation so you can arrange for tax payments to be made if needed and understand how taxes impact your inheritance up front and over time.
#3 Protect New Assets and Revisit Insurance
Depending on what you’ve inherited and how much it impacts your net worth, there may be insurance considerations to make to protect the assets you now have. If you inherit valuable jewelry or artwork, you may need to revisit your homeowner’s policy to ensure they are properly covered. Your umbrella policy, which is an overall liability coverage that sits on top of your home and auto policies, should also be revisited. If this is new financial wealth for you, you’ll want to protect this wealth against potential lawsuits from a car accident, incident at your home, or something else. If you’re a widow or widower, this may not be necessary if you’ve had sufficient coverage prior to the passing of your spouse. There are also other forms of insurance you could review to see if they are still necessary. Maybe you no longer need life insurance if you have plenty of financial resources for the remainder of your life. The same could apply to a long-term disability or long-term care policy.
#4 Clarify Your Goals and Priorities
Now that you understand the tax implications and have taken steps to protect this wealth, it’s time to get clear on what really matters to you. Give yourself some time and a quiet space to think through what's important to you. It's amazing what people do with their lives when faced with mortality. Survivors of cancer, accidents, or other traumatic events often have much greater clarity and go on to make life-altering decisions. Imagine your own mortality. What changes might you consider with only so much time to live? What regrets would you have if you knew today was your last day? The main point here is to explore what actually matters to you and then to align your actions with what you value. Often times, life gets in the way of being intentional. Time and resources are finite for all of us. The best investment you can make is to take time to truly figure out what’s most important and move forward with intention. The clarity that comes from this will allow you to develop more meaningful goals so that you can live a more fulfilling life. Just know that there are financial advisors who are qualified to facilitate such discussions, which can be incredibly valuable as you look to make important decisions.
"When your values are clear to you, making decisions becomes easier."
- Roy E. Disney
#5 Revisit Your Financial Plan
Hopefully by this point, you better understand your goals and have a vision of what you want out of life. It’s now time to develop a plan for bringing this vision to reality. Consult with a trusted financial advisor to see what’s financially feasible. If you have debt, should you pay it off now? If you’re still working, do you now have the freedom where work is a choice rather than a requirement to provide? Do you need to prioritize your goals? Do you have far more financial wealth than you need? If you have more wealth than you need, it may open the door to other possibilities such as charitable causes, taking family members on trips to create memories, funding education for grandchildren, or simply enhancing your lifestyle. The possibilities are endless, so working with your advisor can help you determine what’s financially possible so you can feel empowered to move forward and hopefully live an intentional life.
#6 Revisit Your Investment Portfolio
Additional financial wealth changes your circumstances, so you’ll want to consider if changes to your investment portfolio are warranted. For starters, you may not need to take as much risk if you have sufficient assets to meet your financial goals with a lower expected return. Or you might decide to target more growth with your portfolio if you can afford downside risk without it impairing your ability to accomplish your goals. The question then becomes, what is the growth for? Another more specific consideration is whether you should switch the type of bonds you are invested in because of your new anticipated tax rate. If you’ve been investing in taxable bonds, it might make sense to switch into municipal (tax-free) bonds.
#7 Update Your Estate Plan
Just when you think you’re all set, don’t forget to think about your own estate plan. Put things in order so that if something happens to you, your assets can be passed along according to your wishes. Your financial advisor or attorney should be able to illustrate how your assets will eventually flow to your heirs. With all the financial wealth you now have, do your heirs stand to inherit more than you’d like? Is charity something you might want to consider if you haven’t already? If your children or other heirs are young or perhaps someone isn’t financially savvy, a trust might make sense to protect the assets and ensure they provide for your heirs for an extended period of time. Depending on your level of wealth, you might want to consider strategies for minimizing or eliminating potential estate taxes. The current estate tax exemption amount is just over $12 million per person, but it is scheduled to drop by 50% in a few years. If you haven’t revisited your estate documents in a while, you might need to change the people you have chosen as executor, trustee, or agents for your financial power of attorney or healthcare directive. And remember to verify all the beneficiaries for your life insurance, investment accounts, and retirement accounts to ensure they work with your will to accomplish your overall estate planning goals.
Losing a loved one is hard and receiving a windfall can be a big responsibility. If you address the seven considerations we’ve covered, you should be in a good position to manage your inheritance well. Managing all the considerations here may seem a little daunting, which is one reason many seek out the assistance of a trusted financial advisor to help them make sure they manage all the facets of obtaining new wealth. If you manage your inheritance well and have the clarity to know what your priorities are, you are better able to make intentional decisions and live a life without regret.
Journey Beyond Wealth is an Investment Advisor registered with the State(s) of GA, TN, LA. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy, or the completeness of, any description of securities, markets or developments mentioned. Please consult legal or tax professionals for specific information regarding your individual situation.