In the next few decades, trillions of dollars are expected to change hands as the Baby Boomer generation passes on their wealth to their heirs. “The Great Wealth Transfer refers to the massive shift of wealth from the Baby Boomer generation to Generation X and Millennials, estimated to be around $84 trillion.”
Unfortunately, according to Investopedia, “just 42% or almost half of adults expecting an inheritance in the next decade say they feel confident about their ability to manage the money, according to a survey by New York Life.”
Not only that, but “one third of people who received an inheritance had negative savings within two years of the event.”
Don’t be one of those people.
Let’s talk about what you should consider if you receive an inheritance, the tax implications you should be aware of, and the benefits of speaking with an advisor.
How to Prepare for an Inheritance
It’s hard to imagine receiving large sums of money, but it is important to be prepared just in case. The first step is to educate yourself. Learn more about the assets, the tax implications, and your obligations as an heir. You can also speak with your parents or grandparents and ask them to share their financial plans with you. These conversations can be awkward but can also save you headaches down the road. After all, your loved ones are giving you a gift. They want to see you use it wisely.
Tax Strategies You Should Know About an Inheritance
Inheriting assets can come with tax consequences. Depending on the size of your inheritance, you might have to pay federal or state estate taxes. Also, retirement accounts often have embedded income tax liability and people are far more likely to pay this tax (tax on retirement distributions) than estate taxes. (And all of this is set to change with many TCJA provisions changing without congressional action.)
However, there are legal tax strategies that can help you reduce your tax burden. For instance, you can establish a trust to protect your inheritance and minimize estate taxes. Additionally, gifting, charitable contributions, and paying off debt are also ways to lower your tax liability.
How Not to Spend All of Your Inheritance
Receiving an inheritance can be daunting, so it’s important to manage your expectations and begin planning for the future. Consider paying off debts or investing in long-term goals such as retirement or a down payment for a home. This will help you make the most of your inheritance and ensure that you’re secure for the future.
Talk to a Financial Advisor
Receiving a large sum of money can be daunting; a financial advisor can help you understand your options, guide you on tax strategies, and help you make informed decisions with your inheritance. They can also assist you in creating a long-term financial plan, taking into account your personal goals and risk tolerance.
Receiving an inheritance is a bittersweet moment; you have lost a loved one, but thanks to their careful planning they’ve given you something that can positively affect your future. It’s now your responsibility to make sure you’re using these funds wisely.
Unsure about what to do with your inheritance or want some direction on how to have a legacy conversation with your loved one? We’re here to help. CLICK HERE to make an appointment.