Are You Ready?
It may not seem like it now, but there’s a big economic shift coming our way. Over the next ten to 20 years, tens of trillions will be transferred to Gen X and Millennials. That money can basically go three places: the government via taxes, charity or to people.
The trouble is, unearned money can be difficult to handle, and most people aren’t ready to receive it.
Let’s talk about what you should be doing to plan, or equally important, what you should avoid after an inheritance arrives.
Four Ways to Unintentionally Shrink Your Inheritance
1. Not having a steady financial foundation
While it may seem like inheriting money would solve most financial problems, it often magnifies existing habits. Do you have the skills to manage this money? If you regularly carry a balance on your credit cards, avoid checking account balances, or lack a clear understanding of your discretionary income, adding more money won’t change those habits.
It’s natural to want to improve your lifestyle when money comes in. But unchecked spending can quickly deplete your wealth. Without a budget and an emergency fund, it’s easy to lose track and find yourself back where you started — or worse.
2. Taking risks without doing the math
What do boats, timeshares, unnecessary financial products and your neighbor’s investment opportunity all have in common? They can all seem like great ideas at first, but without calculating the true cost, they can squeeze more money out of you than you intended.
The problem with receiving a windfall is that there are so many ways to let it slip through your fingers. Some of the biggest regrets we’ve seen over the years stem from choosing investments that don’t align with your values and goals.
For example, some life insurance policies can be a powerful way to transfer wealth between generations in a tax-efficient manner. However, it’s crucial to understand the policy details, including premiums, coverage limits, and potential returns. Without this knowledge, you might end up with a policy that costs more than it benefits your heirs.
3. Putting off retirement planning
Retirement age sneaks up on you fast, and expecting an inheritance isn’t a financial plan.
Retirement planning is more than just deciding when to stop working and saving money. You need to think about how you’ll withdraw funds, manage taxes, and cover big expenses.
Without a tax strategy, an inheritance can lead to a hefty tax bill. Most non-spouse beneficiaries have to withdraw all funds from an inherited IRA within ten years. If you haven’t used tax-sheltered accounts, you have less time to benefit from them.
Counting on an inheritance to get you through retirement can be risky. Unexpected expenses, lower-than-expected inheritances, and other surprises can pop up. That’s why having a solid retirement plan is crucial.
4. Forgetting your own estate plan
Sure, you just inherited this money, but life comes at you fast, and it could pass on to your own heirs just as quickly.
Neglecting to create a will or trust is like leaving a puzzle for your loved ones — with missing pieces. Without proper planning, your assets may not go where you intend, and your family could face unnecessary taxes and legal battles.
Consider Prince, the musician who died without a will. His estate, worth millions, became a lengthy and costly legal battle, reducing the inheritance due to fees and taxes.
Not having an estate plan can lead to expensive probate costs for your heirs. Shockingly, 68% of Americans lack a will, leaving their families vulnerable¹.
Having a plan ensures your assets are distributed according to your wishes and minimizes the financial burden on your loved ones. It helps provide clarity for both you and your heirs.
How to Prepare for an Inheritance
1. Become a Student of Finance:
Learn about investments, taxes, and estate planning. Knowledge is power — and in this case, wealth.
- Practice delayed spending: Learn how to save and prepare for big purchases.
- Understand financial concepts: Get a clear understanding of capital gains, step-up in basis, and realized losses.
- Plan for your money: Allocate your funds wisely. Set clear goals and define your long-term financial objectives. Consider how an inheritance will impact different areas of your financial life.
2. Avoid Hasty Decisions:
Take a breath and think carefully before making any major financial moves. Rushed decisions can lead to costly mistakes.
3. Get Your Affairs in Order:
- Update beneficiaries: Ensure your existing accounts have beneficiaries listed.
- Create essential documents: Draw up a will, power of attorney, and advanced health directive.
- Simplify for the next generation: Prepare the next generation to receive the money easily. If you have multiple bank accounts, consider consolidating them.
4. Have a Forward-Looking Estate Tax Plan:
- Assess your future income: Think about what your income will look like when you inherit.
- Consider the types of assets: Will you receive property, qualified accounts, or highly appreciated assets? Plan how to manage these assets effectively.
- Review your tax shelter strategy: Decide whether to contribute to pre-tax or Roth accounts based on your current and future tax situation.
- Plan for highly appreciated assets: Consider the different options like placing these in a donor-advised fund or passing them to future generations to manage tax implications.
- Anticipate increased expenses: If you inherit a property meant to stay in the family, consider the costs of maintaining it.
5. Build a Professional Team:
Seek guidance from experienced experts. Consult a CPA, estate attorney, or financial advisor to create a solid plan.
Remember, the goal isn’t to expect or rely on an inheritance, but to be ready if it happens while building a strong financial foundation of your own.
If you’d like some help getting your plan together or just want to chat about your financial to-do list, please reach out. My team and I are here to help.
Sources and Disclosures:
¹theconversation.com/68-of-americans-do-not-have-a-will-137686
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Bend Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.
The information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Bend Wealth Advisors and not necessarily those of Raymond James
Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.
Any opinions are those of the author and not necessarily those Raymond James Financial Services, Inc., or of Raymond James. The information contained in this presentation does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
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