Inheriting a fortune can be an emotional and overwhelming experience, especially if it was sudden or unexpected. However, you received your windfall, there are steps you can take now, and in the future, to protect and invest it.
First Steps After Receiving an Inheritance
Whether you knew you would be receiving money or it came as a surprise, the reality of it can be a lot to process. Money does bring opportunities, but the idea of managing it can be stressful as well.
Once you’re ready to manage your new wealth, there are some immediate steps you can take to start yourself off on the right track:
- Get clear on the details. Make sure you know exactly how much you’re receiving, and how you’ll be receiving it.
- Understand which taxes and fees you may be subject to, and how you can minimize them.
- Seek out professional assistance in managing your money. A professional will be able to help make the most of your inheritance, and find the most beneficial ways to spend and save it.
Assembling your professional team
Managing a windfall can be stressful. Working with a team of professionals – like a fee-only financial planner, accountant or lawyer – can help you feel confident in your next steps.
Understanding tax implications
Generally speaking, your inheritance is not considered taxable income, so you do not need to report it to the IRS. You also won’t have to pay federal estate taxes on your inheritance unless you’re receiving more than $13.61 million. But there are other situations that might cost you in taxes and fees:
- If the decedent lived in a state with an inheritance tax1, your inheritance may be subject to taxes.
- If you receive an inherited IRA, it may incur taxes depending on the type of IRA and who you are receiving it from.
- Earnings from your inheritance may be taxable.
Creating Your Wealth Management Strategy
Having a strategy in place will help you stay on track as you manage your new wealth. Your strategy should include:
- Asset inventory and organization: Have a clear organizational system for your new and existing assets so that you always know what you have, and where to find them.
- Risk assessment and management: If you have taken on new investments, determine how they will work within your existing portfolio, and if any rebalancing will be required.
- Investment policy statement development: Decide what your investing goals and principles are, and use that as a framework as you figure out how to best use your inheritance.
- Tax-efficient portfolio structuring: Make sure you are aware of any tax implications as you incorporate your new wealth into your portfolio.
Psychological Aspects of Sudden Wealth
For many people, wealth comes after a loss. You may have lost a distant relative, a beloved grandparent, or even a spouse. That loss can make the money you receive feel very emotionally charged.
You might feel a sense of relief to have that money in the wake of a loss, or you might feel resentful about it. However you feel, give yourself some time to grieve before making critical decisions about your newly received wealth.
Common Inheritance Pitfalls
Sudden wealth can bring a variety of pitfalls, but they can be avoided with a little planning. Here are some of the main challenges that heirs face when they receive their inheritance:
Lifestyle inflation risks
By far, the top risk when it comes to wealth inheritance is lifestyle inflation. Without careful planning, it can feel like your fortune will last forever. The reality is that even $1 million can be squandered away quicker than you think.
When you receive your money, make a clear plan how you will spend or save it. Reach out for help from a professional if you need wealth management guidance.
Investment mistakes to avoid
When you have extra money to invest, it can feel like everyone has the secret formula for doubling your fortune overnight. Try not to get caught up in the barrage of advice from “experts,” unless they are a financial planner who understands your unique situation and needs. Avoid the fads and stick to the fundamentals, like focusing on long-term goals and steady growth.
Tax planning oversights
An inheritance might not count as taxable income, but its earnings may be taxed. If you plan to invest your newfound wealth, brush up on limits and tax strategies to avoid surprise fees or a higher than expected tax bill.
Family dynamics challenges
Money can be a touchy subject for families, and conflicts about inheritances are especially common. Perceived unfairness, oversights or favoritism can lead to disagreements and resentment.
The best way to tackle these kinds of challenges is with open, honest communication, whether that be within your family or through a mediator.
Long- term Planning Considerations
Make the most of your newfound wealth with strategies that encourage enduring, long-term growth.
Incorporate your inheritance into your estate plan, and transfer your wealth onto the next generation. You can also use that money to support causes you care about while cutting down on your tax liability, as with donor advised funds (DAF.)
If you have children or relatives whose education you would like to support, you can also give to a 529 plan or other education savings vehicles.
Professional Support Network
Receiving a large inheritance can be overwhelming, so it’s important that you surround yourself with a professional network that will help you navigate this life change.
Choosing the right financial advisor, tax professionals and attorneys will allow you to make informed decisions now and in the future.
But if you want a bespoke, all-in-one solution, family office services can help wealthy families manage everything from budgets and investment management to tax planning and charitable giving.
Whichever route you decide to go with, the most important factor is that you feel heard and understood, and you find professionals you can trust to act with your best interest in mind. Do your homework ahead of time, and meet with a variety of professionals until you find who you believe is the best fit for you.
Sources:
Meris Collier, CFP®
COLLIER, Sustainable Wealth Management
1833 N 105th Street #101
Seattle, WA 98133
(206)805-1770
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