Inheriting Money – What to do When Faced With Sudden Wealth
Even when the influx of a large amount of money is a happy event, for many it can provoke many uncomfortable feelings. There can be even more emotions at play when it is an inheritance, a sale of family property, or even a business exit. A majority of the time, people who come into money tend to go through stages of acceptance, but one thing remains the same. They tend to ask themselves the same question – “Now What?”.
And then there’s the cash itself – what do you do with it? Does it change your financial plan? Are you planning to give some away? Splurge wildly? Pretend it didn’t happen?
There’s no right answer when considering what to do with the money, but some sensible steps can potentially put you in a position to make better decisions that are right for you and your family now and in the future.
Don’t Do Anything Until You’ve Had Time to Process
Emotional flooding in the face of an inflow of money is just as real as in the face of a loss. Money is tangible, and it makes whatever event that led to the sudden windfall very real. And very final. Take your time to understand and process your emotions because it is key in establishing a base. It’s better to have the money sit untouched and unmanaged for a little while than make bad or irrevocable decisions that can have lifetime repercussions.
Some practical considerations:
Are there any immediate deadlines that need to be met?
Do assets need to be retitled?
Do you need to update your estate plan to protect children?
An attorney and a financial advisor can help you take care of any short-term needs to safeguard the new assets and if necessary, include them in your estate plan.
But equally as important is not to make any investment plans or spend large amounts right away. Speaking to inheritance, it’s smart to take a few moments to breathe. Historically, nearly 70% of a family’s wealth is lost from one generation to the next and 90% is lost by the third generation. Your new reality will change you, and what you want will change. At the end of the day, the idea is seek guidance from a team of professionals who are well versed in preserving family wealth.
Make Proactive Tax Plans
There are a multitude of strategies to minimize taxes, but there are other considerations to think through, too. It would be wise to speak to a tax professional about what is owed vs. what you’ll walk away with.
Inheritances can be real property, stock, cash, art, a business or other valuables. If you’ve inherited a stock portfolio or a 401(k) or IRA, you’ll need to be aware of timelines for withdrawing the money, and you’ll have to think about the cost basis of the stock you’ve inherited. Generally speaking - those who inherit a retirement account have up to a maximum of 10 years to liquidate the account. Unless it is a Roth 401(k) or Roth IRA, there will be ordinary income taxes on every dollar that is pulled out.
If you’ve inherited a traditional brokerage account or stock portfolio, the basis of the stock is generally stepped to when the original owner died. The same thing can be said with real estate assets. Using smart tax and estate planning techniques can help mitigate some of the tax burden when inheriting these types of assets.
It May be Time to Reassess Liability and Risk
Normally when someone has a lot of money, they become more in tune with the risk the money poses to themselves and their families on a personal level. Lawsuits are all but common place this day in age and the last thing we want is for someone to come after your personal assets. Reassessing your liability insurance and organizing how your assets are held have the potential to mitigate that kind of risk.
What is Your New Investment Goal?
Now that you’ve obtained a large sum of money, is it just a nice to have, or does it constitute revisiting your retirement plan? Will you give up work early and live off the proceeds? Will you start a business or get serious about a passion project? Do you want to use the funds to make a difference and support causes or charities that are important to you? Maybe a little of everything? You can see how it could become complicated quickly.
Each of those goals would require a very different plan for investing the funds. Like most investments though, they would also require ongoing tax planning. No matter how solid your current financial plan is, the reality is your tax picture will change. Spending the time working with a financial professional to identify what you want to do and then building a financial and investment plan around those goals is a good idea. Honestly, it can take some time for all of that to come into focus.
Most people feel their net worth is lower than what is required to work with financial firms. However In reality, they generally qualify for professional help. With so many moving parts, it is highly advised that you talk to someone about your situation so that you can potentially keep more of your family’s wealth in the family.
Conclusion
The thing about life-changing money is that you want it to change your life for the better. Most of the time that requires a plan. And a successful plan means thinking through what you want, getting an idea of what all of your options are, and then working with a team of strategic advisors to help you carefully implement it.