With the “great wealth transfer” already underway, an estimated $68 to $80 trillion will be passed to future generations. Whether you’re anticipating an inheritance or have recently become a beneficiary of an estate, it’s crucial to approach this situation with a well-thought-out financial plan.
Receiving a significant inheritance can be a transformative moment in your life, creating new opportunities and financial responsibilities. Our blog will look at the key considerations and steps you can take to manage your inheritance wisely.
Read Our Latest Quick Guide: Discover, Design, Deliver: Estate Planning for Wealth Transfer
Manage Anxiety with Goal-Based Financial Planning
Whether you expected it or it came as a surprise, receiving an inheritance can lead to financial anxiety due to the sudden responsibility of managing a significant amount of money. The main source of anxiety for many people is triggered by the fear of making a major mistake. You may worry about making poor financial decisions that could squander your newfound wealth and dishonor the family member who bequeathed you the funds.
To address these concerns, we highly recommend working with a CFP® professional in Washington, D.C., who can assist you in developing a comprehensive financial plan for sudden wealth. Goals-based planning involves setting specific, measurable targets for your financial future, such as retirement, education funding, or philanthropy. This approach helps you make informed decisions about using your inheritance to pursue all of your goals or your family’s goals.
Think of a financial plan as a roadmap that helps guide the management of your inheritance. You have a destination, and the financial planner provides the map.
This might involve allocating funds for short-term needs, long-term investments, and personal or family goals. The plan may also include strategies that address tax liabilities, investment opportunities, and ways to preserve your newfound wealth for future generations.
Avoid Impulsive Spending or Emotional Decisions
You no doubt have a whirlwind of emotions after receiving an inheritance. Along with the emotional aspect, there are also unexpected financial decisions that you’ll need to make.
Your initial reaction can be excitement and the temptation to make impulsive decisions. But beware: this sudden wealth effect can cloud your judgment, leading to purchases or investments that may not align with your long-term financial goals.
Without a clear financial plan, your inherited assets may start to evaporate, undermining the inheritance’s enduring value and potential benefits to your financial well-being.
Before you leap into any financial decisions, consider seeking the advice of a financial advisor who can help ensure your inheritance serves as a foundation for a more secure future and provides the growth you need to keep pace with inflationary pressures. Most importantly, a significant inheritance can majorly impact your retirement, lasting 30 years or more.
Understanding The Source of Inheritance
Each type of inheritance asset has its own set of considerations and tax implications, making it important that you understand the rules that apply to your specific circumstances:
- Direct Monetary Bequests: Receiving money directly often has no immediate income tax implications. However, if the estate is large enough to be subject to estate taxes, the estate pays those taxes before distributing the bequests.
- Property: If you inherit property, such as real estate or vehicles, it usually comes with a “stepped-up” basis, meaning the property’s value for tax purposes is its market value at the time of the original owner’s death. If you sell the property, capital gains taxes apply only to the increase in value from the time you inherited the asset.
- Investments: Like property, inherited stocks, bonds, and mutual funds get a stepped-up basis. This adjustment can significantly reduce capital gains taxes if the investments have appreciated over time and you decide to sell them.
- Beneficiary-Designated Accounts (IRAs, 401(k)s, etc.): These accounts can be complex due to Required Minimum Distribution (RMD) rules, which dictate how and when you must withdraw funds, leading to potential income tax obligations. The specifics can vary depending on whether the account is traditional or Roth and your relationship to the deceased person (spouse vs. non-spouse).
Proactive tax planning is key to minimizing potential liabilities and maximizing the benefits of your inheritance.
The Role of a Fiduciary Financial Advisor
The most critical aspect of managing a substantial inheritance is guidance from a trusted financial advisor. Specifically, a fiduciary advisor with a legal obligation to act in your best interest. This type of advisor can provide personalized advice, help you avoid common pitfalls, and ensure your inheritance contributes positively to your long-term financial well-being.
When considering hiring a financial advisor, asking the right questions is crucial to ensure their services align with your financial goals and needs. Here are five important questions to ask during your vetting process:
- What are your qualifications and experience?
Ask about their degrees, certifications (such as CFP® professional), and years of experience as a financial planner and investment advisor. Understanding their professional journey can give you insight into their expertise and commitment to the industry.
2. How do you charge for your knowledge, advice, and services?
Financial advisors can have various fee structures, including fee-only, commission-based, or a combination. You want to clarify how they are compensated, who compensates them, and how their compensation may impact their advice and services.
3. What services do you offer?
Financial advisors can offer various services, from investment management to financial planning, tax advice, and estate planning. Make sure their offerings match what you’re looking for.
4. How will we communicate, and how often?
Establishing clear communication expectations is crucial. Ask about their preferred methods of communication (email, phone, in-person meetings) and how frequently you will receive updates or have meetings to review your financial plan.
5. Do you have any compliance disclosures?
It’s important to understand if the advisor has any compliance disclosures on their record. You can check the BrokerCheck system or the SEC’s advisor search platform. If the advisor has compliance issues, you should thoroughly review the disclosure, discuss it with the advisor for more clarification, and ensure the advisor documents the outcome.
Get to Know Brown|Miller
The leadership of Christopher W. Brown and David A. Miller guides the experienced professionals at Brown|Miller Wealth Management. After years of experience at other firms, they formed Brown|Miller in 2020 as an independent registered investment advisory firm in Washington, D.C..
Their mission was to create a superior client experience rooted in fiduciary business practices that stand out in a crowded industry. Leveraging years of financial planning and advising expertise, Chris and David assembled a dedicated team capable of delivering comprehensive, personalized financial planning and investment solutions to clients seeking sophisticated solutions to complex financial situations.
The founding principle of Brown|Miller centered on the idea that personalizing client relationships and acting as financial stewards is crucial for building and safeguarding financial futures and legacies.
Our 3D methodology (Discover-Design-Deliver) enables us to craft a comprehensive and nuanced perspective of your financial situation, no matter which phase you are in of your financial life. Through this structured approach, we develop a lasting, impactful financial strategy for you that evolves with your life’s increasingly complex journey.
Ready to learn more about our 3D Discover-Design-Deliver services? Let’s connect for an introductory conversation.
Disclaimer: This article is intended for informational purposes only, and not to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector, or the markets generally.
The information provided in this article represents the opinions of Brown Miller Wealth Management (“BMWM”) and is expressed as of the date hereof and is subject to change. BMWM assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by BMWM at any time without notice. The information may be based on third-party information, which is deemed reliable, but its accuracy and completeness cannot be guaranteed.
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