By: Paul Morrone
I’ve never supported the fact that banking on an inheritance is a sound retirement plan. After all, life happens, and even those who are wealthy when they are 60 may not always be wealthy when they pass away (hopefully) decades later. For those millennials who recently inherited money, it can be life-changing. For those who recently inherited money and plan properly, it can help fast-track generational wealth that will benefit you and your family for years to come. And with the millennial generation about to inherit trillions of dollars from their boomer-aged parents, the time to act is now.
But as the old saying goes, more money, more problems. Fun fact – it doesn’t have to happen that way. There will be inevitable statistics about those who squander their wealth. The savvy millennials will nurture it over time, spending prudently (not necessary frugally – and there is a difference), while continuing with their already existing savings plans to build a balance sheet that brings them to the next stratosphere of wealth. Preparing early is key, as is setting expectations and managing them over time.
If this is your first financial windfall, it should allow you to recalibrate your personal finances to erase some sins of the past (if any) and set you up for a better tomorrow. This means reviewing the inheritance for any requirements and unique circumstances and assessing liquidity, taxes and expenses related to the assets. For example, real estate comes with ongoing expenses to maintain the property, IRAs have required distributions, illiquid securities may not be able to be converted to cash. You should be evaluating your personal balance sheet as well, and using some of the newfound wealth to recalibrate your cash flow, debt service and saving priorities. For example, you could look to eliminate high-interest debt, pay down/refinance a mortgage, pay off a car or settle student loan debt.
Once the ‘bad’ debt is clear and you only have ‘good’ debts, (a mortgage for example), you will want to review some of the goals you have under-funded in the past. This could be college education for children, a downpayment toward a home or funding the purchase of a business. Allocating your new windfall is going to be key in terms of how it can grow over time and this is where a professional can be of greatest assistance, because it’s not just about the stock/bond mix that you have. Planning goes beyond that and should consider how this has changed your life and the ripple effect on your financial households, where asset location has a big impact on the long-term efficiency of an investment plan.
And I can’t stress tax planning enough. There are a myriad of questions here, and a novel could be written about each. Some questions to review with your planner and accountant should be directed at the ownership of the assets, the income generated and how each will be treated on an annual basis in the future. Are you inheriting assets outright, or in trust? Is an estate/trust going to pass you a material amount of income for tax purposes? Do you have any control over it? Do you understand the impact on your marginal tax bracket, now and in the future. Will this disallow certain credits and deductions that you’ve been able to take advent of in the past? How can you minimize the adverse impact of taxes over the next decade or longer? And the list goes on.
Also of note are the ancillary planning items that need to be addressed. A financial windfall is a perfect catalyst to review your estate plans and insurance coverage now that your level of wealth is in a different bracket. You may need to review your life insurance coverage for adequacy now that you’re worth more. Maybe you need to create trust documents to help manage wealth on a generational basis and to protect your children from the unknown. Depending upon your situation, it may be wise to revamp your property and casualty insurance as well, especially if you’ve inherited real property (either personal or business) as this is an often-overlooked item as high-dollar assets are transferring ownership from one individual to another.
The overarching theme here is that an inheritance is not an event to be viewed in a vacuum. The time to plan begins before you’ve even received the money so you can create the infrastructure necessary to be able to handle it prudently. Getting ahead will lead to informed and proactive decision making, as opposed to reactive decisions – or worse being paralyzed and taking no action at all. A comprehensive financial plan should address all these items and more to make sure they are working toward your goals as a family to help benefit you and future generations.
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