According to Money.com, roughly 13% of the American population receive an inheritance of more than $500,000, and 1 in 20 Americans receive an inheritance of $1,000,000 or more. Over the next two decades, these percentages are expected to increase as the Baby Boomer generation, which currently holds over $70T in assets, continues to get older and pass away, leaving their wealth to their beneficiaries. One can only estimate how many people this will affect, but we know it will be the largest wealth transfer in American history.
Receiving a large inheritance should be a financial blessing to the beneficiaries, but like winning the lottery, major financial windfalls do not always end well. Even people who are financially responsible with the best intentions can make catastrophic mistakes that are easily avoidable. Consider the following if you have received or will receive an inheritance.
Take some time after receiving an inheritance before you make any major financial decisions. A common action that beneficiaries make is paying off their debt. While this is a good intention, and for most people a wise financial decision, do not rush into doing this without knowing the risks involved first. Another common action is buying a new home or vehicle. Again, these are not terrible ideas, which means they can be easily rationalized. However, as soon as you make the decision to move a large portion of your inheritance into paying off debt or making a large purchase, you cannot take it back. I recommend waiting 6-12 months, or more, before you make the decision. The inheritance is not going anywhere, and the more time you take to think through the implications, the more likely you will make a decision that you will not regret.
Understand the tax implications associated with each asset you inherit. Not all money and assets are taxed the same. You may receive Roth IRA assets, traditional IRA or 401(k) assets, trust assets, brokerage account or bank assets, or real assets. The value on each of the statements will show a dollar amount, but remember the IRS applies varying rules for how you will or will not be taxed when the money leaves the accounts.
Consider working with an advisor to help you plan for the future. Remember the amount of time and sacrifice it took to create the wealth you are inheriting. Years of compounding growth have already taken place to build that wealth, and you have the advantage of continuing that compounding growth to benefit your family for many years to come. Many people who receive an inheritance will transition from the accumulation phase of finance to the preservation phase of finance. The objectives of these phases are very different, so it is important to work with a professional fiduciary to guide you through the decisions you make. Working with a financial advisor will provide you with counsel that ensures you are making well-informed decisions that align with your financial vision.
Financial Enhancement Group is an SEC Registered Investment Advisor.
