Expecting To Inherit in the Great Wealth Transfer? 6 Steps To Take Now

Financial Advisor Talking To Senior Couple At Home Writing Documents Smiling.
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The Great Wealth Transfer, which is currently underway, refers to one of the largest transfers of intergenerational wealth in the United States. According to Cerulli Associates, younger generations are set to receive an estimated $72.6 trillion in assets over the next 20 years or so — a significant portion of which is coming from the Baby Boomer generation.

If you’re set to receive a significant amount of money or assets in the near future, it’s important to be prepared. This is because there are many nuances, tax implications and other factors that could impact your inheritance.

Here are some steps to take now so that you’re in the best possible situation when the time comes to receive your inheritance.

1. Understand the Types of Assets You’re Inheriting

One person’s inheritance might not be the same as another person’s. Depending on how it’s structured, you could end up with a variety of different assets, such as cash, investment accounts or a life insurance policy. But each asset type has its own tax implications and regulations. That’s why it’s vital to understand what you’re inheriting and how to use it.

“You should first determine what types of assets you will receive — business assets, real estate, marketable securities, non-marketable securities, cash, retirement accounts, etc. Once you know the types, you should find out if you will inherit it outright, in trust and/or what rights you will have over those assets,” said Scott A. Bishop, managing director and partner at Presidio Wealth Partners.

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“Then, you should understand any income tax issues you would have holding or selling those assets. Some assets will be tax-free if sold — due to step-up in tax basis — and some will not, like retirement accounts or annuities.”

Along with this, certain assets have restrictions placed upon them. A trust fund, for example, might have limits on how you can use it. This is especially common if you’re not the trustee. Read through any documents pertaining to your rights carefully. When in doubt, speak with a financial advisor who can help you understand your options.

2. Consider the Tax Implications

As noted, certain assets are taxable, while others are not. “If it is coming from a retirement account such as a 401(k) or IRA (Individual Retirement Account), the money will be taxed, so it is important to discuss the most tax-advantaged way to take the funds with a financial professional,” said Amy Colton, Founder at Your Divorce Made Simple. “If it is coming from the death benefit of a life insurance policy, it is not usually taxed.”

Colton also noted that certain investments — like real estate or certain brokerage accounts — may be eligible for a step-up in basis. “This means that you inherit these assets at the current market value. So, for example, if a stock was purchased at $10 per share many years ago and now it is worth $100 per share, you inherit it at $100 per share, which is what it currently is worth. If you were to sell it immediately after receiving it and it didn’t go up in value, there would be no capital gains on the sale.”

3. Prepare With Your Family

Another vital step is to open the lines of communication with your family. This means talking openly with the person leaving you the inheritance, but also with the people in your household. Doing this can help you figure out what to do with your inheritance moving forward, while ensuring that you — and your descendants — can use it thoughtfully for years to come.

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“Preparing heirs for transferring wealth is often a result of years of family meetings, financial education, transparency and a collaborative approach resulting in the attainment of a family mission statement for guidance to future generations,” said Sharon Olson, CFP, generational wealth specialist and family office founder at the Olson Wealth Group. “A shared vision and mission models behaviors and eases the angst to make good decisions ongoing.”

Cady North, Certified Financial Planner at North Financial Advisors, added, “Unless your family member has done a full inventory of all their assets and liabilities and shared it with you, you’re never going to be able to understand the big picture in advance. So, it’s time to start talking about it with them. Slowly but surely, over many small conversations, this money puzzle can unfold. Once you know what to expect, you can think about how this might fit into your own financial plans.”

If you’re not sure where to start, begin with some open-ended questions about the assets. For example, you could ask how the different accounts are set up. This can pave the way for future conversations and a greater understanding of what’s to come.

4. Get a Team of Experts Together

Before you start planning what to do with an inheritance you don’t have yet, take a moment to make a plan.

“If you expect to receive an inheritance, first take a deep breath and resist the urge to start spending money you don’t have yet,” said James Allen, CPA, CFP, CFEI and founder of Billpin.com.

“Next, get organized by gathering information on your current finances, goals and potential beneficiaries. Then, consult experienced professionals like an attorney, accountant and financial advisor to map out a comprehensive plan that aligns with your values and minimizes taxes. Be sure to include key people like trustees and executors so they understand your wishes.”

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It’s important to review your plan every so often, as your personal situation and regulations may change. Be prepared to update your plan as needed to maximize your inheritance and, ideally, have something to leave behind for the next generation.

5. Start Adjusting Your Mindset

Changing your mindset, especially when it comes to money, can be tricky. But it’s also a key component of ensuring you’re prepared for your inheritance. Sebastian Jania, owner of Ontario Property Buyers, suggested that people who expect to inherit a lot of money should “be focused on working on their mindset. [People who] have limiting beliefs around how much money they can make will have a very difficult time saving and investing the money that they inherit.”

Jania added, “Further, one should be speaking with accountants and wealth advisors to be sure that they have systems in place to invest that money so that they are not susceptible to their own emotional impulses. With such a large amount of money, it’s important to minimize the amount of emotions that one ties to that money.”

6. Consult a Financial Advisor

There are many types of financial experts who can help with your upcoming inheritance, but having a financial advisor on your side can be hugely beneficial as you navigate your situation.

“It is always wise to consult a financial advisor to help you put together an investment strategy based on your unique situation and goals, both for tax strategies and, more importantly, for a sound investment strategy,” said Colton.

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