If you are expecting or have already received a sizable inheritance, this article is for you. Numerous articles talk about how to pass on your wealth to your heirs, but very few address how you, as the recipient, can unlock the full potential of an inheritance from previous generations.
Why is this important? Based on a 40-year rally in stock and home prices, according to Cerulli & Associates, boomers will pass down 84.4 trillion dollars before taxes.
As a wealth management firm in Washington, D.C., we specialize in multigenerational financial planning. We know wealth transfers can be stressful, so we help individuals and families who are undergoing various wealth transfer situations with focused, customized wealth management solutions.
Proper planning is crucial to maximizing the value of your inheritance and avoiding costly mistakes. Here’s a detailed guide to help you navigate this complex process more effectively.
Step 1: Assemble Your Financial Dream Team
As you prepare to receive a transfer of wealth, the first and most crucial step is assembling a team of qualified experts to help you develop and manage all the facets of the assets. This team should include:
- A CPA
- An estate attorney
- A Washington DC financial advisor
Each professional brings unique skills and knowledge to help ensure you are well prepared to handle the various aspects of receiving a substantial inheritance.
- A CPA/accountant can help you understand the tax consequences of your inheritance. This professional can guide you through various complex strategies to minimize taxes and ensure compliance with all relevant tax laws.
- An estate attorney will help you navigate the legal intricacies of receiving an inheritance. They can assist with documents, probate proceedings, trust administration, and any other legal issues that may arise.
- A Washington, DC, financial advisor will help you develop a comprehensive plan to integrate your inheritance into your overall financial strategy. This professional can also provide insights into investment opportunities and help you set and pursue various financial goals.
If you do not want to do the work yourself, it will pay to pick a quarterback for this team to minimize the potential for duplicate fees and conflicting advice.
Step 2: Understand the Assets You’re Inheriting
Once your team of Washington DC CFP® professionals is in place, the next step is understanding the assets you will inherit. This could include investment accounts, real estate, business interests, collectibles, and other types of possessions. Proper valuation of these assets is critical for making informed decisions.
- Investment Accounts: These might include stocks, bonds, mutual funds, and other assets in IRAs and personal accounts. Understanding the value and composition of these accounts is essential for developing a personal investment strategy.
- Real Estate: Whether it’s a family home, rental property, or commercial real estate, understanding the market value and potential income from these properties is important.
- Business Interests: If you are inheriting a stake in a family business or other enterprise, you will need to understand the value of these interests and your role in the business moving forward.
- Collectibles and Other Possessions: Items like artwork, antiques, or jewelry can be valuable. Proper appraisal is necessary to ensure you understand their true worth.
Step 3: Review Your Current Financial Situation
With a clear understanding of what you’re inheriting, the next step is to review your current financial situation. This may include assessing your income, expenses, existing assets, and current debt structure. Doing this lets you develop a plan to integrate and utilize the inherited assets to pursue the best results.
- What is your current cash flow, and how will your inheritance impact it? Will you be required to take Required Minimum Distributions (RMDs) on IRAs that could throw you into a different/higher tax bracket? You should address these questions with a financial planner, as they will help you determine how much of your inheritance can be used for immediate needs versus long-term investments.
- A thorough review of your current assets and liabilities will clarify your overall financial health and help you identify areas where the inheritance can have the most significant impact.
Step 4: Identify Your New Financial Goals
It’s important to identify your short-term, intermediate, and long-term financial goals once you receive your inheritance because there is a good chance your circumstances, goals, and timelines will change:
- Short-term goals include paying off high-interest debt, purchasing a home, or setting up an emergency fund.
- Intermediate goals may include funding your children’s education or making significant home improvements.
- Long-term goals often include retirement planning, estate planning, and major charitable contributions.
Step 5. Develop a Comprehensive Inheritance Plan
Work with a Washington DC CFP® professional to develop a comprehensive plan for receiving, protecting, investing, and utilizing your inheritance to pursue important goals.
Your current financial situation and timing may impact your priorities. For example, you may be in your middle working years (40s, 50s) and have several years until you retire. On the other hand, you may be in your early 60s and are close to retirement. Or, you are already in your early retirement years. Each circumstance would benefit from a tailored financial plan that includes your inheritance.
Tax efficiency should be a top priority, as proper planning can help minimize the tax burden associated with receiving an inheritance and future liabilities.
Ensure that all legal and tax requirements are met when receiving the inheritance. This might involve probate proceedings, transferring ownership of assets, and setting up new accounts.
Consider strategies for protecting your inheritance from potential risks such as market volatility, inflation, or legal challenges. This might include setting up trusts, purchasing insurance, or diversifying your investments.
Develop an investment strategy that aligns with your risk tolerance and financial goals. Your financial advisor can help you identify the best investment opportunities to grow wealth.
Plan how to use your inheritance to support your personal goals. This might involve funding specific projects, making charitable donations, or reinvesting to generate additional income.
Next Steps
By following the guidelines in this article, you can turn your inheritance into a powerful tool for pursuing your financial dreams. That’s all for today. For more wealth and financial insights, please visit us at www.brownmillerwm.com.
