Three Essential Strategies for Managing Your Inheritance
Before you start spending your windfall, take some time to figure out your taxes, how you might invest and what your long-term plan looks like.
Inheriting wealth can be a life-altering event. While it may seem like a straightforward financial boon, it comes with its own set of complexities and emotional nuances. Whether it's a modest sum or a significant estate, managing an inheritance responsibly requires careful thought and planning. Here are three key considerations to keep in mind when you find yourself the beneficiary of inherited wealth.
1. Understand the tax implications.
Taxes can take a significant bite out of inherited wealth. The type of assets you inherit, and the laws of your state can greatly affect the tax consequences. For instance, while life insurance proceeds are typically tax-free, inherited retirement accounts, like an IRA or 401(k), are not and can lead to a hefty tax bill if not managed properly.
In the case of inherited property, you may benefit from a step-up in basis, which can minimize capital gains taxes if you decide to sell. Estate taxes, while only affecting the wealthiest estates, should also be considered.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
When wealth changes hands through inheritance, it brings myriad tax considerations that can be bewildering. The types of inheritance, whether they be cash, investments, property, or retirement accounts, come with different tax treatments. Inherited retirement accounts, for example, can be taxed heavily if withdrawals are not handled strategically. Understanding the rules about required minimum distributions (RMDs) is essential to avoid penalties, particularly since the SECURE Act was passed in December 2019.
Real estate inheritances provide a “step-up in basis,” which means the property’s tax basis is updated to its current market value, potentially reducing capital gains taxes if sold. However, navigating this requires an accurate appraisal at the time of the previous owner's death.
Estate taxes, while not applicable to the majority due to high federal exemption limits, can be significant for larger estates. Some states also levy their own estate or inheritance taxes, which can catch beneficiaries off guard.
2. Invest wisely.
With sudden wealth, there's often the temptation to make large purchases or risky investments. Before making any significant financial decisions, take a step back and assess your overall financial picture. This could be the right time to pay off debt, invest for the future or save for a rainy day.
Consider a diversified investment strategy that aligns with your financial goals and risk tolerance. A good strategy will consider your current financial needs, your long-term objectives, and the economic outlook. Remember, inherited wealth has the potential to secure your financial future if managed with care and prudence.
Inheriting assets creates a pivotal moment to reassess your financial landscape. It's an invitation to reinforce or redefine your investment philosophy. Rushing into high-risk investments or extravagant purchases can jeopardize the longevity of your wealth. Instead, consider whether liquidating high-risk assets you've inherited and reallocating them into a balanced, diversified portfolio aligns with your risk tolerance and investment horizon.
This is also an opportune time to establish an emergency fund, clear debts or enhance your retirement savings. An optimal goal is to chart a course that balances growth with preservation, ensuring that your inherited wealth works toward achieving your long-term objectives.
3. Plan for the long-term.
Inheriting wealth can impact your life goals and retirement plans. It’s an opportunity to reassess your financial roadmap and make adjustments. Do you want to retire early? Are there philanthropic endeavors you wish to pursue? Do you need to set up educational funds for your children?
You might also consider the benefits of estate planning, including setting up trusts, wills and health care directives to manage and protect your wealth. Estate planning is not just for the wealthy; it's a beneficial tool for anyone looking to manage their financial legacy responsibly.
Inheriting wealth should prompt a thoughtful review of your estate plan or be the catalyst to create one. Estate planning goes beyond drafting a will — it's about ensuring your assets are distributed according to your wishes with minimal legal hurdles. Trusts can be strategic tools for managing your wealth, offering control over how your assets are used by future generations and potentially providing tax benefits and protection from creditors.
Philanthropy can also play a role in your planning. Donating a portion of your inheritance can create a legacy that aligns with your values while providing tax benefits. Vehicles like donor-advised funds or private foundations can be advantageous for managing larger charitable efforts and can involve family members in philanthropy, instilling values of generosity and social responsibility.
Before you act, take a moment to breathe.
Inheriting wealth is more than just a monetary transaction; it's an event that can shape your financial trajectory for years to come. Handling it with informed care can ensure that it becomes a blessing and not a burden. Remember to navigate the tax landscape carefully, invest wisely and plan with the future in mind.
Inheriting wealth comes with the power to transform your life and the lives of others. It's essential to approach this windfall with a blend of gratitude and strategic thinking. Grasping the tax implications, investing with intention, and planning for the future can convert a temporary financial gain into a lasting legacy.
If you're navigating an inheritance, take the time to breathe and plan before you act. Wealth management is a marathon, not a sprint. Your objective might be to make informed decisions that will honor the legacy of your benefactors while securing your own financial future.
Take a moment to reflect on the potential of your inherited wealth. Consider how it can be leveraged not just for immediate gratification, but for long-term prosperity. Engage with your financial and legal advisers to chart a path that reflects your ambitions and responsibilities. With deliberate and informed actions, you can honor the legacy behind your inheritance while crafting your own.
Related Content
- New Rules for Inherited IRAs Could Leave Heirs With a Hefty Tax Bill
- Six Steps to Take if You've Recently Inherited Money From a Loved One
- IRS Quietly Changed the Rules on Your Children’s Inheritance
- One Way to Secure Your Child’s Inheritance in an Uncertain Tax Future
- Your Home Would Be a Terrible Inheritance for Your Kids
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Chris Giambrone is a co-founder of CG Capital™, a boutique wealth management firm based in New Hartford, N.Y. He is a CERTIFIED FINANCIAL PLANNER™ and Accredited Investment Fiduciary® (AIF®). Chris has also earned a Certificate in Retirement Planning from the Wharton School of Finance at the University of Pennsylvania.
-
Five Tax-Savvy Ways To Donate This Holiday Season
Charitable Donations Food pantries, toy drives, and animal sanctuaries are popular ways to support others year-round.
By Gabriella Cruz-Martínez Published
-
A Checklist for Retiring in 2025
Navigating the final stretch of your professional career can be daunting. We've compiled a checklist to help you put your best foot forward into retirement.
By Alina Tugend Published
-
Three Possible Tax Impacts for Retirees Under Trump
How might a second Trump term affect your tax bill in retirement — or the inheritance tax bill for your heirs? This pro has three predictions.
By Evan T. Beach, CFP®, AWMA® Published
-
What to Know About Leverage and Bitcoin's Meteoric Rise
Leverage in the financial world can lead to astonishing success or a crushing collapse. How are investors using leverage to invest in bitcoin?
By Stephen P. Harbeck Published
-
How Do You Know When It's Time to Change Financial Advisers?
Sometimes a breakup is for the best. Here's how to handle 'the talk' and make the switch to a new professional who's a better fit for you.
By Kelli Kiemle, AIF® Published
-
The Best Ways to Use Your Year-End Bonus (and the Worst)
'National Lampoon's Christmas Vacation' shouldn't be anyone's go-to for financial advice, but it does remind us how not to spend a holiday bonus.
By Frank J. Legan Published
-
LLCs: Power Tools That Can Create Big Problems
Forming an LLC for your business might seem like a straightforward endeavor, but if you don't know exactly what you're doing, trouble could follow.
By Rustin Diehl, JD, LLM Published
-
Never Talk About Money? For Women, That Can Spell Disaster
How can you plan for retirement when your husband holds the purse strings and talking about money is taboo? Help is at hand for this common problem for women.
By Cynthia Pruemm, Investment Adviser Representative Published
-
How Combining Your Home Equity and IRA Can Supercharge Your Retirement
While many retirees own an IRA and a home, very few are considering how they could work together in a plan for retirement income.
By Jerry Golden, Investment Adviser Representative Published
-
The Six Estate Planning Steps Every Blended Family Must Take
Whether your blended family is newly formed or fully fledged, use these six steps to review your estate plans now and lower the risk of conflict in the future.
By Stephen B. Dunbar III, JD, CLU Published