The Great Wealth Transfer: Managing Your Inheritance Wisely

12/2024

We are in the midst of one of the most substantial intergenerational transfers of wealth in history. Referred to as the “Great Wealth Transfer,” it is expected to continue for another couple of decades. Baby boomers are the primary source of the wealth being transferred to younger generations across the United States. Some estimates put the amount of assets that will be transferred at over $68 trillion.

For many, this inherited wealth will provide opportunities that weren’t previously available, such as early retirement, investment opportunities, or funding for personal passions. However, it can also come with complexities that require careful planning and decision-making. Here’s a guide to approaching and managing an inheritance wisely.

Key Steps to Managing an Inheritance

Take Time to Grieve and Process

Receiving an inheritance often follows the loss of a loved one, making it an emotionally charged experience. It’s important to take time to process your grief before making any major financial decisions. Many financial experts recommend waiting at least six months before making significant financial changes. During this time, consider consulting a financial professional and an estate planning attorney to lay the groundwork for a well-informed approach.

Assess the Full Scope of the Inheritance

Inheritances can come in many forms, including cash, real estate, retirement accounts, stocks, or valuable items such as jewelry and collectibles. Understanding the types of assets you’re inheriting will help you determine how to handle them. For instance:

• Liquid Assets: Cash and easily sellable investments can be readily accessed and managed.
• Real Estate: Real property may offer rental income opportunities or potential appreciation, but it also comes with maintenance and management responsibilities.
• Retirement Accounts: These often have specific tax implications depending on the type of account (e.g., 401(k) or IRA, and beneficiaries may need guidance on handling required minimum distributions).
• Other Assets: Jewelry, artwork, and collectibles may require appraisals, storage, or insurance.

Consult Financial and Legal Professionals

Working with the right experts, including financial advisors, tax advisors, and estate planning attorneys, can help you navigate the complexities of managing an inheritance. These professionals can offer insight into:

• Tax Implications: Inheritances can come with tax liabilities, especially for large estates or specific asset types. A tax professional can help you understand potential estate taxes, capital gains taxes, or other obligations.
• Investment Strategies: A financial advisor can provide guidance on investing an inheritance based on your financial situation, long-term goals, risk tolerance, and timeline.
• Estate Planning Needs: If you have family members or dependents, now might be an excellent time to create or update your own estate plan.

Strategies for Financial Growth and Security

Build an Emergency Fund

If you don’t already have an emergency fund, setting aside a portion of the inheritance can help create a safety net for unexpected expenses. Wealth management experts typically recommend saving about six months’ worth of living expenses in a low-risk, easily accessible account.

Pay Down Debt

Eliminating high-interest debt, such as credit card balances, can be one of the best uses of an inheritance. Reducing debt can improve financial flexibility and lower long-term costs, freeing up future cash flow for other investments or needs.

Invest for the Long Term

Investing a portion of the inheritance can help you grow your wealth over time. Some options include:

• Stocks and Bonds: A diversified portfolio of stocks and bonds can provide growth potential and income.
• Real Estate: Real estate investments can offer cash flow through rental income or appreciation over time.
• Retirement Accounts: Contributing to tax-advantaged retirement accounts like IRAs or 401(k)s can provide long-term benefits and tax savings.

Plan for Charitable Giving

Many people find meaning in using part of their inheritance to give back. If you want to support charitable causes, consider setting up a donor-advised fund or making direct donations. Charitable giving can also provide tax advantages, especially for large inheritances.

Pitfalls to Avoid

Inheriting money or other assets can be a real financial windfall, but the inheritance can disappear quickly or cause problems. Be aware of pitfalls such as these:

• Overspending: Many fall into the trap of overspending after receiving a large inheritance. A financial plan can help you establish guidelines for spending, saving, and investing.
• Ignoring Tax Consequences: Inheritances can come with various tax implications, particularly for complex assets, such as retirement accounts or real estate. By working with a tax professional, you can avoid unexpected tax liabilities.
• Family Dynamics and Conflicts: Inheritances can sometimes create family tension, particularly if there are differing opinions on asset allocation. Open communication and working with professionals can help reduce misunderstandings and ensure that family dynamics remain healthy.

Building a Legacy

An inheritance offers the chance to think about your legacy and future generations. Consider how you want to use this wealth to support your family, community, and personal values. Setting up an estate plan or trust can help ensure that your assets are distributed according to your wishes, protecting your legacy for the future.

Be sure to consult with your estate planning attorney. They can discuss your specific situation and help you create an estate plan that will help you protect your inheritance and achieve your legacy goals.