Inheriting a significant amount of money is rarely a bad thing. But it does come with a unique set of challenges that aren’t always apparent. If you don’t have experience with large sums of money, you may not know what questions to ask or the pitfalls to avoid. This guide can help you cover your blind spots, ask the right questions, and decide what professional help you might need to manage the inheritance.
What does having money change?
For better or worse, money and wealth translate to opportunity and open doors. What does that kind of power mean to you? There’s no shortage of cautionary tales about the people who fail to ask this question. Consider the number of lottery winners or professional athletes who declare bankruptcy. In our experience, you can avoid this pitfall by asking a few simple questions: What does having this money mean to you, and what do you want it to do for you?
Answering these questions can help you avoid missteps and put your money to work. None of that is to say you shouldn’t enjoy new money. However, assigning a sense of purpose to your money can help you enjoy it for longer and achieve your goals.
What kind of money or assets did you inherit?
Not all money is created equal. Inheriting cash is different from inheriting property or an investment account. The rules around inheriting investments differ depending on whether those investments are in an IRA, a 401(k), a taxable investment account, or a trust, to name a few.
The way assets are passed to you, including how they’re titled and transferred, can impact what you do next in terms of investing or spending the money. Plus, different assets and accounts come with different tax implications.
You should also think about how comfortable you are with the type of asset you inherited. If you’ve never owned property before, spend some time thinking about the associated costs you may not have considered previously. If you inherit digital assets, like cryptocurrency, do you know how they work? If you’ve never invested before (or haven’t invested outside of a 401(k) or similar), do you know how to buy, sell, and otherwise manage stocks, bonds, and the like?
Do you understand the tax implications?
There’s a misconception floating around that if the federal estate tax doesn’t apply to you, you don’t owe any taxes on the money you inherited. That may be true, but in reality, there are numerous tax questions to consider. For instance:
- Some states have their own estate and inheritance taxes. Do you know the difference between an estate tax and an inheritance tax and who pays for each?
- If you inherit money in an IRA, the IRS has strict rules around what you do next and when. Do you understand what your required minimum distributions (RMDs) may be and the rules and penalties that surround them?
- Inheriting property can cause the asset to “step up” in value, meaning you could be facing higher property taxes. Step-ups can also impact the type and amount of tax you pay if you sell.
- Do you understand the difference between short- and long-term capital gains as they pertain to your new holdings?
- As you make decisions, are taxes being automatically withheld for you, or do you need to be proactive to avoid a surprise bill?
What kind of impact do you want to make?
It can be strange to think about giving away money you’ve just inherited. However, we often hear from people who’ve just come into money that they want to use it to make a difference and give back. To do that effectively, start by thinking about how this money fits into the big picture of not just your life, but the lives of those around you. Are you hoping to provide for your family (and for how long)? Do you want to support charities or causes beyond your immediate family? Asking these questions before you start spending (or start paying taxes) could benefit you in the long run.
Do you know where to go for help?
An inheritance comes with a lot of moving pieces—there are legal, tax, investing, and lifestyle questions involved. One person may not be able to advise you on every part of the puzzle. You may need a full team (or as we like to say, a quorum) to truly get the most out of a windfall.
Estate attorneys
It’s nearly impossible to transfer a significant amount of wealth without involving lawyers, simply because there are laws that govern how these things take place. You may want to hire or consult with an attorney who specializes in estate planning. Depending on your personal circumstances, it may help you to hire your own representation separate from other beneficiaries or the estate itself.
Tax professionals
An accountant can help you with both the logistics and strategy of managing an inheritance. Keep in mind: Not all accountants are created equal. Look for someone who is certified to work with people (versus corporations) and specializes in tax, ideally with a focus on wealth transfer. Be sure to ask them: Can you help me with strategic decisions or do you only focus on tax preparation, paperwork, and filing? If you expect them to offer guidance as well, make that clear in advance.
Financial advisors
A financial advisor can help you develop a strategy for managing and growing your inherited assets based on your goals. They can also help you assess the best ways to invest your inheritance and avoid costly mistakes that could reduce its value over time. Look for an advisor with experience in wealth transfer and tax planning. Not every advisor has the same level of experience with tax code or the parts of tax code that apply to an inheritance. Ask what qualifications and certifications the advisor has. Make sure you understand how they’re paid, if they have a conflict of interest, and whether they’re required to put you first (some aren’t!). Different types of advisors are held to different standards, and it’s critically important that you find an advisor you can trust.
Nonfinancial support
Inheriting wealth can be an emotional experience. Often, it’s tied to the loss of a loved one, and it’s common for people to develop complicated feelings around money and grief. Beyond that, if you’re new to managing large sums of money, it can feel overwhelming. All of these factors can create bad money habits. Bad money habits may not seem like a big deal in the face of immediate grief or stress. However, ignoring the emotional component of new money is a big reason for those cautionary tales about squandered wealth. Think about who you can go to for advice and support on the nonfinancial side of things. This could be friends and family, a life coach, a therapist, or even a financial therapist (they exist!).
Managing an inheritance effectively may mean consulting multiple people. Beyond that, it requires the right mindset. That starts with making sure you understand all of the moving pieces at play when you inherit money. From there, it takes a village to truly maximize the value. It’s critical to remember that inheriting money is about more than just dollars and cents; it’s about building a legacy, funding your dreams, and opening doors.
If you aren’t sure where to start, or want to see what our team of advisors can do to help you navigate everything we just explained, set up a meeting to discuss.
