Over the next 25 years, 45 million households will be receiving an inheritance after the passing of a loved one, according to analytics firm Cerulli Associates. The transfer of assets from baby boomers to millennials and beyond will be in excess of $68 trillion.
According to a poll by the Ohio State University, most Americans will only save about half of their inheritance. That means most Americans will essentially use it for immediate gratification purchases. Firsthand, I’ve seen how some beneficiaries used their inheritance on special breed dogs, new cars, lavish vacations, and other items.
I won’t discount that some of these impulse purchases are due to a form of mourning after the loss of a loved one. However, if we can plan properly for when these inevitable wealth transfers occur, a person’s financial plan can allow the inheritance to flow nicely into it. Here are a few examples of what to do if you know that you’ll be receiving an inheritance either soon or in the future.
Follow the Wishes of the Deceased
If your loved one had wishes on how the money was to be spent or who it was to be spent on, hopefully they had those conversations with the beneficiaries already. If not, well-crafted estate documents should explain their wishes and instructions.
Take It Easy
It’s ok to think of some of this money as a windfall. Weigh the cost of the total inheritance against the price of what you want. Discuss the idea with your trusted financial advisor. Having a second opinion from a great advisor can be helpful, especially if they can calculate how it will affect any future compounding of your own pile.
Assemble the Team
If you don’t already have a trusted fiduciary advisor, now is the time to interview and acquire one. Similarly, find a trusted estate attorney because your finances may get a bit more complicated after you receive the inheritance. Now it’s time for you to make your own instructions for your wishes by drafting estate documents to surpass you. Hire a CPA to weigh in on the potential taxes of your decisions as well. A team approach will pay dividends in planning opportunities down the road.
Review Your Finances
If you don’t already have one, build an emergency fund with your new inheritance. Depending on your financial
situation, having three to six months’ worth of necessary expenses in an easily accessible high yield account will help you sleep at night knowing that you can cover an emergency purchase on a rainy day or help with expenses if you are furloughed or lose your job.
Other Items to Think About
Sometimes, people don’t just inherit cash or securities. Sometimes, they inherit houses, cars, or jewelry. The estate documents of the deceased may explain how to handle these other items. If not, this is another area where that team approach can help you. You may now be in the realm of capital gains tax, and items kept need to be added to your estate documents. Will a second home become a rental property where liability protection may become necessary?
Use your inheritance wisely, and do not try to handle it all on your own. For some, emotions can cloud financial judgement. Trusted professionals are here to guide you through it all, and most of them have extensive experience to provide insight. Remember to seek out true fiduciaries that will steer you in a direction that benefits you and not them. We are here to help!
Derek M Oxford | CFP®, AEP®