Two-thirds of baby boomers are expected to receive a significant inheritance in their lifetime. Moreover, boomers themselves are expected to pass down more than $30 trillion in assets over the next few decades to their children and grandchildren.
Most inheritances are passed down when a loved one dies, so receipt often triggers mixed emotions and feelings. In addition to the emotional impact, receiving an inheritance usually introduces new financial complexity, tax implications, and long-term planning opportunities. If you’re one of the fortunate ones receiving an inheritance, consider the following strategies to leverage your inheritance for long-term financial success.
Here, Boulay’s Wealth Management Team covers:
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- What should I do after receiving an inheritance?
- How can I manage inheritance money wisely for financial growth?
- Should I invest or pay off debt with an inheritance?
- What are the tax rules for inherited IRAs or assets?
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Wait Before Making Major Financial Decisions
Take time to review your financial situation and long-term goals before making any big changes you may later regret. A six-month pause is often recommended—but take the time you personally need.
Understand Your Options for Life Insurance Proceeds
If you’re offered an annuity option or the purchase of a new policy, evaluate the pros and cons carefully. Most people benefit from choosing the lump-sum payout, but it’s best to consult your financial advisor first.
Use Inheritance Money to Pay Off High-Interest Debt
Focus on eliminating “bad debt” like credit cards, college loans, or high-interest mortgages. Paying off these liabilities sooner can provide immediate financial relief and long-term savings.
Max Out Your Retirement Contributions
Increase your 401(k) contribution to the maximum limit and fully fund your IRA or Roth. If you’re self-employed, contribute the annual maximum to your SEP or solo 401(k). Not only will you boost your retirement fund balances, you’ll also reduce your taxable income.
Know the Rules for Inherited IRAs
Inherited IRAs come with special rules. Inherited traditional and Roth IRAs are subject to the Required Minimum Distribution (RMD) rules, meaning beneficiaries are required to withdraw a portion of the funds each year based on their life expectancy. Any withdrawal from a traditional IRA will be taxable in the year received. In addition, all inherited IRAs must be titled properly and cannot be combined with other retirement accounts.
Understand the Tax Implications of Inherited Assets
In addition to inherited traditional IRAs, some annuities and other assets may have imbedded tax consequences if they are sold. Work with a tax professional to avoid surprises when liquidating or reallocating.
Explore Estate Planning and Asset Protection Strategies
Now that you have new assets, it’s important to ensure those assets are protected. You don’t want to lose them due to some type of legal issue, now or in the future. Estate planning, including the discussion of trusts, updating of wills and beneficiaries, and appropriate account titling may be valuable. Also, evaluate your personal liability insurance or “umbrella” policy to determine whether your coverage should be increased.
Celebrate & Honor Their Legacy
When the time feels right, consider using part of your inheritance to do something meaningful—whether it’s a trip, a home project, or a gift to others. An inheritance is money or assets your loved one worked hard to save. You can honor the giver and their legacy by leveraging the new opportunities it brings—for your benefit or for the benefit of future generations.
Working with a financial advisor for inheritance planning can help you avoid costly mistakes and ensure your windfall aligns with your long-term financial goals. Boulay’s Wealth Team is here to help you develop a personalized financial plan and make the most of what you’ve been given. Connect with us today to learn more.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Investment Advisory Services offered through Boulay Financial Advisors, LLC a SEC Registered Investment Advisor. Certain Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor. Securities offered through Valmark Securities, Inc. Member FINRA, SIPC
Boulay PLLP and Boulay Financial Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc. Prime Global is not affiliated with Valmark Securities, Inc. and Valmark Advisers, Inc.