I Went Through a Generational Wealth Transfer: Here is What I Think Heirs and Beneficiaries Should Know

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It’s expected that over the next two decades, roughly $84 billion will be transferred from Boomers to Gen Xers and Millennials. This generational wealth transfer will be one of the biggest ever.

This leaves both heirs and beneficiaries with the important task of understanding how to approach this great transfer of wealth. How do you balance leaving enough for your loved ones with gifting to causes that are important to you? Within this article, we’ll dig into everything you need to know to prepare yourself for the great wealth transfer.

1. Transparency Is Important

Most families hate talking about money. Many will do whatever it takes to avoid the topic altogether. However, when it comes to planning for the future, parents and children need to have these tough discussions. 

According to an Ameriprise Financial Money and Family study, only 19% of people are transparent with their families about finances. To have a successful transfer of wealth, it’s important to discuss what the family’s finances look like and what the plan is going to be. 

Will money be distributed equally between beneficiaries? Will anything be transferred to charitable organizations? Are there any requests from parents on how the money should be used or invested? These are all questions that should be discussed ahead and time to avoid potential conflicts down the road.

2. Understand Tax Implications

Depending on your relationship and the state where you live, you could be on the hook for an inheritance tax. This is slightly different than an estate tax because the beneficiary is responsible. Currently, there are only six states that impose an inheritance tax and that will be reduced on January 1, 2025, when Iowa eliminates the tax. 

Make Your Money Work Better for You

It’s also important to understand the tax implications you might have if you inherit assets other than cash.

“If you receive property as part of your inheritance, such as a house or land, be aware of potential property taxes,” says Michael Ryan, former financial planner and founder of Michael Ryan Money. “The value of the property may increase your annual property tax obligations, and you might need to budget accordingly.”

The same is going to be true with other investments.

Ryan goes on to say, “If you decide to sell these assets, any appreciation in their value since the original owner’s acquisition will be subject to capital gains tax. It’s crucial to understand the cost basis of inherited investments and consult a tax professional to make informed decisions.”

3. Determine Your Goals

When you inherit a large sum of money, thinking about your goals is going to be an important step. How do you want to use this money? Maybe you need to pay down debt. Maybe you want to use it to upgrade your home. Or maybe you just want to strengthen your retirement nest egg.

No matter what you end up doing with the money, it’s important to have a plan in place.

4. Wait Before Making Any Major Financial Moves

While you might have goals and know what you want to do with your inheritance, give the decision some time to sink in. 

A considerable inheritance can be life changing, so it’s important to pause before making any big decisions. Sit it out and avoid spending the money right away.

Make Your Money Work Better for You

Now you’re probably wondering how long you need to wait before you can use the money. While there is no perfect time frame, it should be a few weeks or a few months. Don’t rush yourself as this can be an extremely emotional decision.

5. Know How To Manage Money 

One of the biggest struggles most people have with money is not knowing how to properly manage it. Even though there is an abundance of resources available, enlisting the help of a professional is the best step to take to avoid money management mistakes. 

“Engaging a financial advisor or estate planning attorney can provide invaluable support during this transition,” says Ryan. “They can help you understand your options, navigate complex financial matters, and ensure your inherited assets align with your long-term goals.”

6. Don’t Liquidate Accounts All at Once

One of the biggest mistakes that a lot of people do is they liquidate inherited accounts immediately. This can have negative tax implications. 

“Depending on the size of the inheritance, you could save income taxes by taking distributions over a number of years rather than all at once,” says Al Kingan, JD, LLM, CLU, ChFC, an estate and business planning executive with MassMutual.

“Beneficiaries other than a surviving spouse, a minor, an individual with a disability, or a beneficiary less than 10 years younger than the account owner will be required to liquidate the account by the end of the 10th calendar year after the date of death.”

Plus, it’s important to remember that if you’re inheriting a retirement account where the heir was taking required minimum distributions (RMDs), you’ll need to continue those distributions, as well.

Make Your Money Work Better for You

If you’re in a position to receive an inheritance, it’s important to be smart. Understand what your heir’s wishes might have been and make sure you’re putting a plan into place. If you’re unsure about everything you need to do, it’s ok to hire someone to help with the decisions. 

Depending on the size of your inheritance, this could be life changing. You want to make sure you make all the right decisions to protect your new wealth.

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