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Inheriting Wealth

Anthony J. Scrocco, CFP®, CPA

08/11/2021

Inheriting assets as a beneficiary, whether unexpected or something you have known about for some time, can be life changing as you may find yourself suddenly wealthy. You may be surprised by the size of the bequest or the diverse assets you have inherited, overwhelmed with the complexities, and questions will certainly arise about what to do next. In addition to the emotional and technical components of inherited wealth, receiving a large legacy will spark a lot of critical questions that are important to address within the context of your own personal financial plan. You should carefully evaluate your new financial position, consider your short- and long-term goals, and consider the tax and investment consequences of your inheritance, among other issues.

Evaluating your new financial position
Before you spend or give away significant money or assets, decide to move, or leave your job, you should take a step back and thoughtfully consider how this changes your financial trajectory and impacts your goals. Building or updating a comprehensive financial plan will be a critical first step. Your updated strategies will partly depend on what types of assets (e.g., cash, property, or portfolio of securities) and what types of accounts you have inherited (e.g., non-qualified, retirement, or trust). In addition, it is important to determine whether you have immediate access to, and total control over, the assets, or if they are being held in trust for you. Beneficiaries of a trust should employ the help of legal and financial professionals, making sure you understand the language and implications of the trust.

Short-term and long-term needs and goals
Once you have determined what type(s) of assets you have inherited, you should prioritize your short-term and long-term needs and goals. For example, in the short term, you may want to pay off consumer debt such as high-interest loans or credit cards. Your long-term planning needs and goals will likely be more complex. Considerations typically include timing and funding of your retirement, investment risk tolerance and related asset allocations, paying off long-term debts (i.e., primary mortgage, student loans), funding college education for children or grandchildren, minimizing taxes, and lifestyle goals such as travel or charitable giving.

Tax consequences of an inheritance
In general, you will not directly owe income tax on assets you inherit (though a handful of states can levy an “inheritance” tax). However, a large inheritance could mean that your income tax liability will eventually increase as inherited assets may produce a substantial amount of taxable income, thus increasing your tax bracket. Ever-changing and complex tax laws make tax planning a critical component of cash flow planning, a dynamic that is magnified when inheriting wealth. Tax rules related to “stepped-up basis” on assets at death, and rules pertaining to “required distributions” from inherited retirement accounts (e.g. IRA’s), as modified by the SECURE Act passed by Congress in December 2019, are just a few examples of the intricate rules. Financial planning and income tax reduction strategies could help mitigate your overall tax liabilities.

Other Considerations
Several important aspects of your financial life will undoubtedly be impacted immediately when wealth is inherited. A few additional examples to consider:

  • Investing – Inheriting assets can completely change your investment strategy. You will need to figure out how to invest the new assets to best meet your objectives. Questions to consider are: What is your tolerance for risk? All investments carry some risk, including the potential loss of principal, but some carry more than others. How well can you handle market ups and downs? Are you willing to accept a higher degree of risk in exchange for the opportunity to earn a higher rate of return? How diversified are your investments? What is your time horizon for needing cash flow from these investments?
  • Insurance – When you inherit wealth, you will need to re-evaluate your insurance coverages. For example, you may need to recalculate the amount of life insurance you want or need; the appropriate level of protection is dependent on your circumstances. Also, your additional wealth results in your having more at risk in the event of a lawsuit or long-term medical event (e.g. long-term care).
  • Estate planning – When you increase your wealth suddenly, it is time to re-evaluate your estate plan documents. Estate planning involves determining how your assets will be distributed after your death. This could include strategies to minimize your estate’s exposure to potential taxes as you try to optimize financial security for your family and other intended beneficiaries. Wills and trusts should be reviewed to make sure that your current legacy wishes are properly reflected, especially if you have minor children.

Planning for your financial future involves many moving parts and intricacies in normal times. A significant inheritance will surely add to the complexities of your financial life. Employing a thoughtful and intentional planning approach is imperative to preserving and effectively utilizing the gift you have received. If you receive an inheritance, or expect to in the future, there is no better time to rely on a fiduciary professional to help with comprehensive financial planning and strategies before making major financial decisions.

IMPORTANT DISCLOSURES

The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.

Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.

The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.

HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.


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