We are currently witnessing one of the largest transfers of wealth between generations in history, often called the “Great Wealth Transfer.” The trend, which is expected to unfold over the next few decades, primarily involves Baby Boomers passing on assets to younger generations throughout the U.S. Additionally, the total value of this wealth transfer is projected to exceed $68 trillion, potentially impacting both individual financial well-being and the wider economy. For many, inherited wealth presents opportunities for early retirement, investments, or pursuing personal passions. However, maximizing your inheritance comes with its own set of challenges.
To help navigate this process effectively, here’s a comprehensive guide to making smart, informed decisions during this life change.
Essential Steps for Managing Your Inheritance
Managing an inheritance is a significant responsibility that requires careful thought and planning. Whether it’s a windfall of assets or a more modest inheritance, taking the right steps ensures that your newfound wealth is used wisely. Let’s explore the key actions you should take to manage your inheritance effectively, secure your financial future, and avoid common pitfalls.
Take Time to Grieve and Process
Inheriting assets often comes after the loss of a loved one, making the experience emotionally challenging. Before making any major financial decisions, it’s crucial to give yourself time to grieve and reflect. Financial advisors typically suggest waiting at least six months before implementing significant changes. During this period, it’s wise to consult with a financial professional and an estate planning attorney to ensure you take a thoughtful and informed approach to managing your inheritance.
Assess the Full Scope of the Inheritance
Inheritances often include a variety of assets, such as cash, real estate, retirement accounts, stocks, or valuable items like jewelry and collectibles. Understanding the different types of assets is essential for making informed decisions about how to manage them. Here’s a breakdown of common inheritance types:
- Liquid Assets: Cash and easily marketable investments offer quick access and flexibility in managing your finances.
- Real Estate: Property may provide opportunities for rental income or long-term appreciation, but it also comes with ongoing maintenance and management responsibilities.
- Retirement Accounts: These assets can have specific tax considerations, depending on the account type (e.g., 401(k) or IRA), and beneficiaries may need expert advice on handling required minimum distributions.
- Valuable Items: Jewelry, artwork, and collectibles may require professional appraisals, proper storage, and specialized insurance coverage to protect their value.
Consult Financial and Legal Professionals
Partnering with the right professionals, such as financial advisors, tax experts, and estate planning attorneys, is crucial for effectively managing an inheritance. These specialists help guide you through the complexities of inheritance management, offering valuable insights in the following areas:
- Tax Considerations: Inheritances may come with tax responsibilities, particularly for larger estates or certain asset types. A tax advisor will help you navigate potential estate taxes, capital gains taxes, and other related obligations.
- Investment Guidance: A financial advisor will help you develop a strategy for investing your inheritance, taking into account your current financial situation, long-term objectives, risk tolerance, and time horizon.
- Estate Planning: If you have dependents or family members, it’s a good opportunity to create or revise your own estate plan to ensure your assets are properly protected and distributed according to your wishes.
Tactics for Building Financial Growth and Security
Growing and securing your wealth requires a strategic approach that balances smart investments, risk management, and long-term financial planning. By making informed decisions, you can be more effective in maximizing your inheritance while ensuring financial stability for the future.
Build an Emergency Fund
If you don’t already have an emergency fund, consider using a portion of your inheritance to build one. Doing so provides a financial safety net for unexpected costs. Financial experts generally suggest setting aside enough to cover six months’ worth of living expenses in a low-risk, easily accessible account for peace of mind.
Pay Down Debt
Paying off high-interest debt, like credit card balances, is one of the most effective ways to use an inheritance. Reducing debt enhances your financial flexibility, lowers long-term expenses, and frees up cash flow for future investments or other financial needs.
Invest for the Long Term
Investing part of your inheritance helps you grow your wealth over the long term. Some options to consider include:
- Stocks and Bonds: A well-diversified portfolio of stocks and bonds offers growth potential and can provide a steady income stream.
- Real Estate: Investing in real estate can generate rental income or appreciate in value over time, adding to your overall wealth.
- Retirement Accounts: Contributing to tax-advantaged retirement accounts, such as IRAs or 401(k)s, can provide long-term financial benefits and help reduce your tax burden.
Plan for Charitable Giving
Many individuals find fulfillment in using part of their inheritance to give back to charitable causes. If you’re interested in supporting organizations, you might consider setting up a donor-advised fund or making direct donations. Charitable giving can also offer tax benefits, particularly for larger inheritances.
Avoid These Common Pitfalls
Inheriting money or assets can be a significant financial windfall, but without careful planning, the inheritance can quickly be spent or lead to complications. Be mindful of potential pitfalls, including:
- Overspending: It’s easy to fall into the trap of overspending after receiving a large inheritance. Creating a financial plan helps set clear guidelines for saving, spending, and investing wisely.
- Overlooking Tax Implications: Inheritances often come with tax responsibilities, especially for more complex assets like retirement accounts or real estate. Working with a tax expert helps you avoid unexpected tax liabilities.
- Family Tensions and Disputes: Inheritances can sometimes cause family conflicts, especially when there are differing views on how assets should be distributed. Open communication and professional guidance can help prevent misunderstandings and maintain family harmony.
Maximizing Your Inheritance While Building a Legacy
An inheritance provides an opportunity to reflect on your legacy and the impact you want to have on future generations. Think about how you’d like to use this wealth to support your family, community, and personal values. Establishing an estate plan or trust helps ensure your assets are distributed according to your wishes, safeguarding your legacy for the future.
Contact us today for a free consultation to start your estate planning journey. We will assess your unique situation and help you create a comprehensive estate plan that protects your inheritance and helps you achieve your legacy goals.
Bromlow Law, PLLC and Laura L. Bromlow, are dedicated to the practice of Elder Law and Estate Planning. Our practice focuses solely on working with clients in these and closely related legal fields. Laura L. Bromlow is a Certified Elder Law Attorney with the National Elder Law Foundation. Bromlow Law, PLLC strives to enhance communication among family members and loved ones and to keep them all out of conflict so they can stay out of court. We want to help you keep your close circle safe!
Please contact our office today at (281) 665-3807 to schedule a free consultation to discuss your legal matters. We look forward to the opportunity to work with you.