I’m a Financial Advisor: Here’s What You Should Do If You Inherit Generational Wealth
Imagine for a second that you’ve just become wealthy overnight. A loved one passed away and left you a hefty inheritance that has set you up for the rest of your life.
Right now you’re grieving the loss of a family member, while also trying to figure out what you’ll do with the money. Use this advice from several financial advisors to handle your newfound wealth responsibly.
Assemble Your Team
If you inherit a large sum of money, don’t try to manage it yourself. Kevin M. Curley, II, CFP, a wealth advisor with Global Wealth Advisors in Dallas, recommended meeting with key advisors to learn how the funds will impact your financial plan, estate planning documents and taxes.
“To avoid a large tax bill by taking all the money in year one, consider opening inherited IRAs for beneficiaries,” he said. “Spreading out the distributions over 10 years can help lower the tax burden.”
If you’re not sure who exactly to hire, Peter J. Klein, chief investment officer and founder at ALINE Wealth, said you’ll need professionals in accounting, legal and a financial advisor (FA) — a fiduciary who is only motived by your best interests.
“Together you can build a dashboard of assets, which will give you a visual representation of viewing assets from different perspectives and discuss your long-term goals and cash flow needs,” he said. “Let the FA build you an investment policy statement to codify the policies that will guide your advisors as they allocate your capital.”
Burn Through a Tiny Portion
It might not sound responsible, but spending a little money right away can actually be a good idea.
“Recognize that there is often a burning desire to do something with the money, and letting a bit of steam out of that pressure valve can help bring clarity,” Curley said. “Light it on fire, but keep the expenditure small.”
He said any regret or joy experienced from spending a bit of the money can serve as a guide for what to do next with it.
Take Time to Process
While you might spend a small portion of the money quickly, it’s worth taking your time to figure out what to do the rest. “Reflect on your newfound wealth and what that means for your future,” Klein said.
He said you can now afford to go out and buy things, but advised really thinking about if that will make you happy. “Take meaningful time to decide on your long-term financial goals before you splash out on any instant gratification rewards and you will likely have room for both.”
Create an Estate Plan
“You are going to need a well-thought through estate plan with trusts and other types of legal documents to protect your newfound wealth and ensure that taxes upon your death are minimized,” Klein said. “In some cases, you may have to reduce control of these assets — to minimize tax impact — and in doing so you will need to hire a trustee.”
He recommended hiring a corporate trustee to handle this. “They are unemotional and have a permanence that individuals do not and could impact your children’s relationships with each other, if you have multiple close family members.”
Consider Philanthropy
“Paying it forward is a wonderful way to continue to build on generational wealth,” Klein said. “Set up a private foundation or a donor advised fund (DAF) where you can designate a certain portion of your newfound wealth for society, and by doing so, you can create a legacy that will live on long past you.”
Get Your Kids Involved
“It’s very important to instill in your children the responsibility that comes with wealth,” Klein said. “In estate planning, you can set up ‘incentive trusts,’ which will match a child’s W-2 income for a certain number of years, as a way to dissuade a child from not working.”
Whether you give them a seat on the board of a family foundation or set them up with a business they love, he said it’s important to engage your kids in conversation about financial goals — both yours and theirs.
Move Past the Guilt
Receiving an inheritance can make you feel elated, but also guilty, isolated and confused, said Rachelle Tubongbanua, CFP, AWMA, private wealth advisor managing director at U.S. Bank.
“To work through your feelings of guilt, consider how you define success and how you separate happiness from wealth,” she said. “Start by figuring out where your guilt about your wealth is coming from.”
She said to think about the opportunities wealth can offer, such as improving your relationships with loved ones or helping you grow personally.
Give Yourself Some Grace
“Recognize that it’s normal to feel confused and to begin to question existing relationships,” said Brad Hindman, CFP, financial advisor and managing director of investments at Wells Fargo Advisors.
He said many people who inherit wealth find it helpful to talk to someone about their thoughts and feelings. “Finding someone who listens, care[s] and can stand by you through this process can make a significant difference.”
Understand Tax Issues
After inheriting a lot of money, people often take action without knowing the financial consequences, which includes taxes in a big way, said Jeremy Bohne, founder at Paceline Wealth Management, LLC.
“Always be sure to understand the result of any actions before you take them, and consider spacing out your plans over several years so you don’t needlessly push yourself into an adverse tax situation by doing things all at once,” he said. “Also be aware of any recent reforms to state taxes, as a number of states have adopted unfamiliar ways of taxing wealth.”
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