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Imagine this scenario: Sarah is a successful professional in her late 40s who just inherited a significant sum of money and a diversified portfolio of investments from a beloved aunt. Although her aunt had been ill for some time, the finality of her passing, coupled with the unexpected size of the inheritance, leaves Sarah feeling overwhelmed.
Her first instinct is to pay off her mortgage and finally book that dream vacation. However, a quiet voice reminds her that her aunt was always incredibly thoughtful and deliberate with her finances. Sarah decides to take a few weeks to process the news before making any major financial moves.
Your Initial Assessment Checklist
Inheriting wealth is an emotional journey. It’s okay to feel a range of emotions, from grief to excitement and even anxiety about the responsibility that comes with new resources. Like Sarah, it’s advisable to take some time to sit with the news and with your feelings.
When you’re ready to take the first practical steps, here are a few suggestions on where to begin:
- Take Inventory: Create a clear list of everything you inherited, including cash, investments, property, business interests, and other assets. Gather relevant documents like statements, deeds, and any existing financial plans.
- Pause Before Acting: Resist the urge to make any immediate, significant financial decisions or lifestyle changes. Give yourself time for thoughtful consideration.
- Connect With Advisors: Reach out to essential professionals like a financial advisor, a CPA, and an estate attorney. They can be crucial partners in navigating the complexities.
Tax Considerations for Inherited Wealth
Tax considerations can vary significantly depending on the type of asset and the amount. Keep in mind:
- Federal Estate Tax: This tax is typically paid by the estate itself, not the beneficiary, but be aware it applies to very large estates.
- State-Specific Taxes: The deceased’s state or your state might levy additional estate taxes or inheritance taxes, which beneficiaries must pay..
- Income Tax on Inherited Retirement Accounts: Withdrawals from inherited retirement accounts (like IRAs or 401ks) usually trigger income taxes. Understand the specific distribution rules, such as the 10-year rule for most non-spouse beneficiaries.
- Capital Gains Basis: Many inherited assets receive a “step-up in basis,” resetting their value at the time of death, which can reduce future capital gains taxes if you sell them.
- Watch for Deadlines: Your estate attorney or CPA can help identify any specific deadlines for filing forms or making decisions, especially for inherited retirement accounts.
- Identify Liabilities & Opportunities: Work closely with your advisors to uncover potential tax liabilities and opportunities for tax-efficient management or distribution strategies.
Align Your Inheritance with Your Life Goals
With a clear understanding of your inheritance and its tax implications, it’s time to integrate it thoughtfully into your life. Here are some questions to consider:
- What are your current financial priorities? Could this inheritance help eliminate high-interest debt, boost your emergency fund, or strengthen your financial security?
- How does this impact your long-term goals? Can it accelerate your retirement savings, fund future educational opportunities for loved ones, or support significant charitable giving?
- How will you avoid “lifestyle inflation”? Resist the urge for immediate, large purchases that could derail your long-term financial stability. Focus on integrating the wealth strategically.
- How will you balance today’s needs with tomorrow’s dreams? Work with your advisor to create a plan that addresses immediate priorities while setting a strong foundation for the future.
Develop a Comprehensive Financial Strategy
Your existing financial plan was built around your previous resources; new assets require a review and update. This means assessing your cash flow, adjusting budgets as needed, and re-evaluating your goals to fully incorporate this new financial picture.
Beyond your overall plan, consider that the assets you inherited might not perfectly align with your current risk tolerance, time horizon, or diversification strategy. Work with your financial advisor to assess the new asset allocation, realign it with your risk tolerance, and optimize for both growth and income.
Finally, consider updating your estate plan. This is a critical step that an inheritance can significantly change. Ensure your will, trusts, and beneficiary designations are up to date, as these documents supersede your will and are often the most direct way to pass on assets to your loved ones.
Seek Advice
Inheriting wealth often comes with a mix of emotions, from profound sadness to unexpected confusion. It’s a significant life event that can feel overwhelming as you navigate financial decisions while processing personal feelings. This is precisely why professional guidance can be so valuable.
A wealth advisor who specializes in inherited wealth understands these nuances. They can act as your guide, helping you create a tailored strategy that integrates your inheritance with your existing wealth and long-term goals. They can navigate complex tax laws, optimize your investments, update your estate plans, and offer an objective, empathetic perspective during what is often an emotionally charged time.
If you have questions about an inheritance or wish to speak with one of our advisors, please contact us.
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The scenarios presented in this article, including the client examples, are purely illustrative and for demonstration purposes only. Actual client circumstances and results will differ.
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