Reasons Why Receiving an Inheritance Might be Trickier Than You Think

It has been estimated that more than $41 trillion will be transferred to heirs in the United States over the next 50 years. This is the largest transfer of wealth in U.S. history.  Are you entitled to some of this pot of money? If you are, there are some things you should be aware of and steps you should take to make sure the Inheritance goes smoothly without any surprises.

INHERITING AN IRA ACCOUNT AFFECTS MORE THAN JUST YOU

Much of this $41 trillion (and property) will be passed to people who are already wealthy, well educated, or who otherwise might be considered “prepared” to receive an inheritance.  However, an inheritance can also go to minor children, heirs with disabilities, non-US citizen residents, people who are receiving needs based government benefits, and folks just surviving from paycheck to paycheck.  While an inheritance is a blessing under any circumstances, I have seen many clients act in haste without getting professional advice, often ending up with severe or unexpected financial consequences.

Estate attorneys, accountants and financial advisors say you should take your time when you receive word you may be inheriting a large sum of money or property.  This is good advice for many reasons. An inheritance can be tricky and there are no two the same nor are most as straightforward as you might think. To help guide you through a “successful” inheritance, there are some guidelines I believe everyone should consider before they receive their inheritance.

RECOMMENDATIONS FOR INHERITING AN IRA ACCOUNT

Here are a few recommendations I would suggest you follow if you are going to receive an inheritance:

1. Be discreet. Don’t immediately rush out and tell the world (your siblings, friends, neighbors, relatives, and co-workers) about your new found wealth.  Such discretion will reduce the amount of solicitations from those you know as well as from those you don’t know.  It will allow you to maintain some privacy while adjusting to your new, and potentially challenging financial status.
2. Be true to your values. Just because you received some additional monies, don’t let it change who you are as a person. Use the money you receive in a manner consistent with your personal values, goals, and aspirations.
3. Don’t stop working or otherwise building your wealth in the short term. Many heirs immediately quit their jobs and make major purchases like a house in the first few months after receiving an inheritance.  In many cases, the best decision is to continue working.  For example, if you inherited $500,000, you could live on it, or you could continue working and give yourself a 5% raise every year from the investment returns on your inheritance, and then reward yourself by retiring several years early. Or you could use the additional return for a much needed family vacation and not impact your current life style.
4. Take your time and get expert advice before doing anything. Consult with advisors who are experts in the area of managing (new) wealth ahead of time.  In the short term, the best thing to do is to deposit your inheritance in a money market account or other instruments that don’t put the principal at risk.  A CPA/accountant and estate attorney can help you understand and navigate the tax and legal issues that might be created and must be considered with your new found wealth.  Your financial advisor can also help you develop a long term investment strategy consistent with your risk tolerance and retirement goals.
5. Address your most pressing financial needs first. If you are going to use some of the money early on, pay off your highest interest and most pressing debts first, but due so carefully and strategically.  Make sure you set aside a minimum of one year of savings in a “rainy day fund” just in case something goes wrong in the future.  This is also a great time to review your insurance coverages, particularly liability coverage, as your new found wealth could be a lucrative target in our litigious society.
6. Pay close attention to your tax status. Taxes are a common area many people overlook when it comes to an inheritance. For example, if you inherit a 401k, or an IRA, or a tax deferred annuity or savings bonds and decide to cash them in with a lump sum payment BEFORE consulting a tax advisor, you could lose as much as 40+% of the inheritance right from the start in just combined state and federal taxes.  You will also find yourself immediately in higher tax brackets.  Such missteps are common place when you don’t get expert advice.  You may be better off “stretching out” your income over several years, if that option is available.

There are more than these 6 issues to consider but this should hopefully get you thinking a bit more deeply when you are receiving an inheritance. If you are getting an inheritance, that’s awesome news. I just want to make sure you get to keep it and use it to your advantage for many years to come. Get some quality advice before anyone finds out and you well prepared to enjoy it the rest of your life. When this happens, you definitely will have No.More.Tears. when it comes to an inheritance.