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Sorting out what to do with inheritance dollars often involves a combination of emotional fortitude and practical strategy. In this video, I share some key questions, the financial implications for planning, and share several resources to learn more as you determine what to do with inheritance dollars.

Click here for the infographic and explore the hyperlinked resources.

Click here for my checklist, Issues to Consider if I Experience a Sudden Wealth Event.

If you prefer to read the content rather than watch the video, you can find it below:


 

If you’ve recently inherited from a loved one, you’re probably experiencing mixed emotions. It can be a challenging time that often includes a combination of mourning, nostalgia, and an overarching feeling of wanting to do the right thing. 

If you only have 30 seconds, scroll to the description part of this video and click on the links. One will take you to the infographic I’m about to review. The other is a checklist that I review with my client families who are navigating an inheritance. It summarizes the financial implications you may want to keep in mind.

For those of you with a few more minutes, let’s walk through this infographic together, starting with some statics about inheritance:

  • While it varies widely, the average middle-class inheritance is $110,050, according to a 2019 survey of Consumer Finances. 
  • There’s a bit of a disconnect here; according to an HSBC survey, most American individuals expect to leave roughly $67k more than that. The difference may be due to unexpected taxation during the transfer of assets.
  • You may have heard the idiom ‘from shirtsleeves to shirtsleeves in three generations.’ Statistics show that between the inheritance your parents left to you and what you may leave to your children, the odds are there will be very little left for your grandchildren. 

So how can you serve as a good steward of the inheritance you’ve received? Here are some important questions to ask yourself:

  • The first is, what is the inheritance comprised of? Is it securities like stocks/ bonds or mutual funds? If so, is it in an IRA or brokerage account? Is it held in a trust or the name of an individual? Is it real estate? Is it personal property like jewelry, art, or antiques? All have unique considerations regarding tax, liquidation, requirements, and more.
  • The next is to think about the goals you have for this inheritance. Because money is still unfortunately taboo in many households, many families don’t discuss it, which means inheritance is often an unexpected gift, and receiving one can open opportunities you never thought possible.  
  • Those opportunities can involve liquidation for immediate use, investing for the future, gifting to meet philanthropic desires, or some combination. It’s not uncommon for those who inherit to want to honor their heirs somehow – there are many options to accomplish this. 
  • As mentioned earlier, the tax liability involved in your inherited assets and how you can use them varies widely. Some inherited assets receive a step up in basis – like after-tax brokerage accounts, meaning the tax liability is relatively low early on. Others, like IRA accounts, are 100% taxable as ordinary income and come with required minimum distribution deadlines that are important to keep track of.
  • Another important question to ask is whether this inheritance comes with problems. Whether it’s from other beneficiaries, disagreements on the interpretation of the estate documents, or a new expectation of support from your family members, several challenges can come with this new financial obligation, and it’s good to be aware of those early on.

Financial implications of inheritance can include: 

  • Updating your cash flow plan – does this inheritance comes with distributions that will impact your cash flow today?
  • Tax planning is a huge piece of all financial planning, particularly inheritance, as we talked about.
  • It often opens up the opportunity to explore purchases or debt payoffs that you haven’t thought possible before
  • Regardless of where or the amount, receiving an inheritance almost always merits a fresh look at your estate plan. For example, while a will may have been sufficient before, your asset size and new goals may now benefit from establishing a trust of some kind, so it’s great to take a high-level look at your options and visit your attorney.
  • Equally ubiquitous, an influx of money, in whatever form, warrants a fresh look at your overall asset allocation and investment strategy. What pots of money do you have designated for specific needs, and how are those invested (or not)? 

When we face loss, it is normal for our brains to move into logistics planning. It is a self-preservation method. When your left brain needs to plan, here are a few resources to explore:

  • The book, Sudden Money has been a staple in inheritance planning since 2000 and still has legs. What I love about this book, and why I have it at the top of my list here, is that it takes a realistic approach to inheritance. It’s not a money event – it’s a life transition involving much more than just money. 
  • Family Trusts provides a step-by-step guide for those of you navigating the settlement of an estate. It’s a wonderful resource to consult if you’re creating your estate plan, another common takeaway from receiving an inheritance. 
  • This checklist is the one I mentioned at the start. It’s one that I review with my clients when they receive an inheritance and covers the financial planning implications listed above one-by-one. 
  • Nolo.com is a great free resource that distills over 50 years of legal authority in one spot, providing resources for legal matters, including estate and gift tax laws.

When your right brain needs some attention, when you need to take care of the part of you that is mourning and in pain from this loss, here are a few resources to explore:

  • Bearing the Unbearable is all about navigating the path of grief. I like it because it’s broken into short chapters that serve as accessible invitations to lean into and out of your grief as your journey unfolds.
  • Receiving an inheritance often brings about feelings of obligation, stewardship, and sometimes guilt about how you should or shouldn’t spend that money. The Soul of Money is an excellent book for any time but can bring powerful insight when read through the lens of receiving an inheritance. It encourages us to look at our attitudes toward money – how we earn, spend, and give it away. This is valuable information to take with us as we try to serve as good stewards of what we’ve received.
  • As I mentioned a minute ago, it’s common that we learn some valuable lessons from our loved ones in their last months and in the time after their passing. Maybe you saw them navigate long-term care, the impact of a perfectly (or not so perfectly) organized estate plan, or their satisfaction (or dissatisfaction) with the legacy they built. This last book, Mom Dad, We Need to Talk, is designed for adult children who need to understand their parent’s financial situation. That may be you. Or, maybe you are the Mom or Dad who needs to talk about your financial and estate plan with your adult children. Either way, this book can provide a great starting place for the conversation. 

A lot of moving parts come with receiving an inheritance, and it can be hard to reconcile the technical with the emotional, and it’s impossible to separate them. I hope you take comfort in knowing that there are advisors who are comfortable walking both paths with you. I am one of many and warmly invite your questions, comments, and thoughts when you’re ready. Stay well.