Four Do’s and One Don’t to Help Protect Your Inheritance

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published 12 May 2024

Much has been written about the so-called Great Wealth Transfer and the trillions of dollars loved ones can expect to inherit from parents and grandparents over the next 20 years or so.

I’ve read articles estimating that Baby Boomers, and the Silent Generation before them, could leave anywhere from $68 trillion to $84 trillion, or more, to their children and favorite charities. And as a financial adviser, I’m already seeing the impact those gifts can have on the people who receive them.

Of course, everyone can’t (or won’t) leave behind a life-changing legacy for their family members. But even a small amount of money can have consequences for recipients — especially if they aren’t prepared for it. This is why it can be so helpful for older generations to share their gifting plans, formally or informally, with their potential heirs. And why younger generations also should have a plan for any money they might receive.

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Here are five things to keep in mind if you expect to inherit money from a loved one (or already have):

1. Take things slowly.

Coping with grief can take time, so don’t feel as though you have to rush into spending, investing or doing anything right away with the money you inherit. But you should make sure it’s safe.

If you receive cash, for example, you may want to park it in an FDIC-insured savings account until you’re ready to make some decisions. (The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category — so if it’s a larger gift, you may want to spread it over multiple accounts.)

If you receive property or an investment account as a gift, things will be a bit more complicated — so again, take some time to figure out your next steps.

2. Don’t spend the money before you get it.

There’s a fine line between planning for an inheritance and making moves prematurely because you’re expecting to receive a large bequest. Your loved one may want to leave you a generous gift, but if his or her circumstances change — because of an illness, nursing home bills, bad investments, etc. — the amount may not be what you expected.

It’s important to build your financial plan around what you can provide for yourself and not a promised windfall.

3. Consider the tax implications.

The federal government doesn’t charge an inheritance tax — and only a few states do. But you still could end up with a substantial tax bill, depending on the type of assets you inherit (real estate, art, investment accounts, etc.) and how they are held.

Many people, for example, aren’t aware of the complicated rules for taking distributions from an inherited retirement account, such as a 401(k) or traditional IRA. And that lack of knowledge can lead to expensive mistakes.

I once met a couple in their 50s who inherited a little over $1 million from the wife’s father’s IRA. They took all the money out at one time and paid cash for a $600,000 home. This left them with about $400,000 to live on, along with their own savings … so they decided to retire. What they didn’t realize — until they received a huge tax bill about a year later — was that the $1 million distribution put them in the top federal tax bracket, which was 37% at the time. Penalties and interest added to the tax burden. They both ended up going back to work so they could save up and retire a second time.

4. Make the most of the money.

I’m not saying don’t splurge a little. And I’m definitely not saying that you shouldn’t retire if you receive a large enough inheritance to make it possible. I’ve found that, in many cases, older Baby Boomers and retirees from the Silent Generation had a lot of money to leave behind because they didn’t spend as much on themselves as they could have. That doesn’t have to be you.

Younger Boomers, and even more so the generations behind them, often say they want to retire in their 50s or early 60s, while they’re young and healthy and can enjoy themselves. And I agree: Go get your decade!

A gift from a loved one could make an earlier retirement possible or give you a boost as you save for a more comfortable lifestyle. Just be sure that you have a well-thought-out plan for how you’ll manage it before you make that leap.

5. Ask for help if you need it.

It’s never too early or too late to talk to a financial professional about how an inheritance could affect your investment plan, your retirement plan and, yes, your own estate plan. At our firm, we refer to this type of important financial planning as “your financial GPS,” because it can help you understand where you are now and how you’re positioned for the future.

I know talking about death is never easy — and many families would rather avoid this conversation. But planning ahead for an inheritance — or making a plan for how you’ll use money that came as a surprise — can help you protect and enjoy this wonderful gift your loved one wanted you to have.

Kim Franke-Folstad contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Investment advisory services offered through Graylark Financial, LLC, a Registered Investment Adviser with the State of Colorado. Content on this site is for informational purposes only. Opinions expressed herein are subject to change without notice. Graylark Financial, LLC has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Graylark Financial, LLC has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal, or tax advice. An investor should consult with their financial professional before making any investment decisions.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As CEO of Colorado-based Graylark Financial, Brian Gray is passionate about helping people achieve their financial goals and realize their bucket-list dreams. Financial education is a priority in his practice, and he is the co-author of three books (“Smiling Through Retirement,” “Retire Abundantly” and “Giving Transforms You”) with another on the way. Brian has been a regular on Denver radio and has been featured in several local and national publications, including Fortune, Money, Bloomberg Business, Wall Street Select and MarketWatch.