7 Ways Indebted Millennials Should Invest a Gold Rush of Inheritance
Written by
Caitlyn Moorhead
Edited by
Amber Barkley
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Though the idea of receiving a windfall because someone has died is somewhat morbid to contemplate, it’s an important reality to reckon with. If you’re expecting an inheritance that could change your life for the better, financially, you need to be prepared, and you need to be careful — especially if you’re in debt.
A significant amount of wealth that will be changing hands as baby boomers age and pass on their assets to family or charity. This is known as the Great Wealth Transfer, and it will be life-changing for millions of millennials who will inherit their parents’ assets when they die.
If you’re unfamiliar with the Great Wealth Transfer, here are some key takeaways:
- According to Cerulli Associates, baby boomers and the Silent Generation will pass down a combined $84.4 trillion in wealth to younger generations.
- The Great Wealth Transfer in many ways has already begun, and the transfer of wealth and assets from the boomers to millennials, Gen Z and younger will continue through 2045.
- The majority of this gold rush of wealth will be going to Gen X and millennials.
If you are a millennial planning your long-term retirement savings and strategies, consider taking these investment tips and steps to manage the potential windfall of wealth when your elders pass on.
Understand Your Inheritance
When preparing for an inheritance, or upon receiving it, you need to know exactly what you’ve been gifted as a lump sum. What assets are now under your wealth management? How can you use this extra money to get out of debt or start investing more?
“Is it a pre-tax retirement account? There will be distribution requirements and taxes the beneficiary will need to factor in,” said Matt Sampson, a certified financial planner (CFP) and wealth advisor with Coldstream.
“Is it a taxable brokerage account? Those will get a step up in basis to the date of death valuation, representing a highly tax-efficient asset to inherit: You could turn around and sell a portfolio of stocks that had huge unrealized gains before death and pay no capital gains taxes after death. Are you inheriting real estate?”
You should find out the answers to these questions before you start moving money around.
Make Sure You’re Aligned With Other Heirs
You may not be the only one coming into money when your parents die. If you’re sharing an inheritance, you need to be in alignment with anyone who also has a stake in the assets. Unfortunately, not everyone is listening to the same financial advisor or working with the same credit card balance, so money motivations can vary.
“Do you and your siblings agree on the best path forward for this asset?” Sampson said. “Disagreements can present a unique set of challenges for equalizing the estate if one sibling wants to maintain real estate and the other wants to cash out.”
Keep Living Below Your Means
Whether you get a boatload of wealth passed down to you, or even just a small bundle, it’s crucial to not allow it to trick you into leading a more lavish life or lean into lifestyle creep. Keep living below your means, because even though your wealth may have increased, your high-interest debt also has to.
“The secret to building wealth is living below your means,” said Melissa Murphy Pavone, a CFP and the founder of Mindful Financial Partners. “As your income increases, lifestyle inflation creeps in. Avoid the urge to spend more as you make more. Save more. Invest the difference. Your future self will thank you.”
Analyze Your Cash Flow
A top goal when inheriting assets is to use them to build wealth. One of the first things you should do toward this goal is to analyze your cash flow.
“[This is] because if you don’t understand where your money is coming from and where it is going, you can’t adequately manage it,” said Stephen Kates, another CFP and the principal financial analyst at Annuity.org.
“Begin with your gross income and categorize all money destinations, including taxes and savings. Many people have an unknown ‘miscellaneous’ bucket of expenses that can grow and shrink monthly and ends up being a black hole for cash. You don’t need to track every penny, but you should understand the types of expenses that capture your money.”
Sharpen Your Investment Education as New Money Can Make You an Easy Target
You’ll want to start or deepen an investing practice when you come into money, but you’ll have to be extra educated and careful. You could be an easy target for financial salespeople who don’t have your best interest in mind.
“When someone becomes wealthy, they suddenly become a target for advisors and financial sales professionals,” Kates said. “This isn’t necessarily a bad thing, but it is something that many people are unprepared for.
“Most millennials are not receiving direct mail, calls or emails from big financial institutions, but they will soon. Having an unbiased third-party advisor to help you build a rock-solid financial plan is vital, but you may want to find one on your own, before they find you and pitch you the latest and greatest financial products.”
Set Financial Goals and Aspirations
To prepare for new wealth, refocus on your financial goals and aspirations. Whether it’s buying a house, paying off loans and debt or just figuring out a debt management plan, make your new financial windfall work for you.
“Defining what you have today, and what you need tomorrow, will allow you to determine how to allocate your finances towards current and future needs,” Kates noted. “Prioritize your wants and needs.
“Most people can only have a few big goals to prioritize financially before incremental goals will start to undermine the plan. Your ‘North Star’ goals will allow you to focus current and future resources toward the ones that make the most sense for your life.”
Help Your Parents Build Their Estate Plan Before It’s Too Late
Perhaps the most important move you can make in preparation of an inheritance is getting organized before it happens.
“Building a plan for your own legacy later in life is important, but first consider the legacy your parents and older relatives are preparing to leave,” Kates said. “Many baby boomers are learning first hand today how difficult it is to handle an inheritance from their own parents when there is a disorganized estate.
“Don’t let this happen to you. Encourage a dialogue to determine your relatives’ dreams and wishes for their own legacy.”
Final Take To GO
The bottom line is that the only two guarantees in life seem to be death and taxes, so planning for the inevitable is best for everyone involved. Make sure to be proactive about estate planning, tax implications of the Great Wealth transfer and how much you communicate with your loved ones when it comes to inheritance.
It may sound overly simplified, but the more you prepare now, the more you’ll be prepared for when you get a gold rush of assets.
Nicole Spector contributed to the reporting for this article.
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