Effectively Managing an Inheritance

Trillions of dollars are currently being transferred down to the baby boomer generation and according to Cerulli Associates, over the next 25 years, 45 million U.S. households will pass $68 trillion to their children.  The average retiree expects to leave $177,000 to their heirs. Unfortunately, according to the National Endowment for Financial Education, 70% of all people who receive an inheritance will go through it in a few years.  Studies have found that the average inheritance is spent within five years and one third of those receiving an inheritance have negative savings within two years.  

Below are some guidelines on how to change that trend and maximize your inheritance:

1. Take Your Time – Inheriting money is very emotional because along with a financial windfall, you experience a significant personal loss.   This can make you feel guilty, confused and overwhelmed.  Give yourself time to grieve and think about your new financial situation.  Don’t make major financial decisions for at least 6 months.   

1. Keep it Private – Don’t share the news of your inheritance with friends, family or strangers.   A financial windfall can negatively impact relationships.  Friends and family can feel awkward or become resentful, they may expect you to pay for everything and encourage you to spend extravagantly.  You can also become a target of unscrupulous business and investment schemes.

1. Understand Tax Consequences – Unless your inheritance is extremely large, it shouldn’t be subject to estate tax.  However, you may have to pay income tax.  A lumpsum withdrawn from an IRA or retirement plan will be subject to regular income tax rates upon distribution.   You can minimize taxes and let most of your money continue to growing by transferring it to a spousal IRA or an inherited IRA, where distributions are taken over time.

Money inherited from a taxable account and real estate is not taxable upon inheritance.  You receive a step-up in basis equal to the value of the asset upon the decedent’s death.

1. Hire a Trusted Team of Professionals – Select a Certified Public Accountant, a fee-only financial planner and an Estate Planning attorney who will work in your best interest to help you minimize taxes and manage your inheritance.

1. Set Financial Goals and Create a Plan – Set goals and create a plan on how you want to use your money.  Think about how your inheritance can be used to have a positive long term impact. Goals may include establishing an emergency fund, paying down high interest debt and credit cards, paying off student loans, maximizing retirement contributions, making a down payment on a home or paying off your mortgage, funding children’s college or making a charitable contribution.  

1. Have Fun! – Put aside 5 percent to 10 percent to enjoy yourself and celebrate the life of your benefactor.

Be intentional on how you spend your inheritance.  Honor the legacy of the person who left you this generous gift by using the money in a meaningful way.