Receiving an inheritance brings with it a wide range of emotions—grief for the loved one you lost and eagerness or excitement for the sum you’re about to receive. But as you tackle the responsibility of managing a large inheritance, it’s important to remember that it can too easily be squandered. Fortunately, as a high-net-worth individual, you and your family may already have a solid sense of responsible saving and spending. But when the time comes to manage an inheritance, there are five steps you may want to consider taking to make the most out of your loved one’s final gift.
Step 1: Coordinate with Your Trusted Team
Before making any sudden movements, you should assemble a team of financial professionals you can trust to have your best interests at heart. If you do not yet work with financial professionals, take your time finding those who are familiar with your situation or who have worked with others in similar situations. When a large amount of wealth is involved, you need to know you have professionals with the right intentions. You’ll likely want to coordinate with your:
- Financial planner: With this important change in financial status, you’ll want to speak with your financial planner regarding the effects this inheritance can have on your total financial picture.
- CPA: You'll want to work with your CPA to understand the possible tax implications this new inheritance could have on the upcoming tax season.
- Attorney: You may already be well aware of the liability and life insurance measures that should be taken, but it won’t hurt to work with your attorney to make sure you, your family and your money are protected.
- Insurance agent: Beyond a lump sum, some high-net-worth inheritances could include art collections, classic cars, jewelry and more. To keep your new collections protected, you may want to meet with your insurance agent to discuss these inherited valuables.
Step 2: Understand Your Tax Obligations
According to the IRS, individuals can leave up to $12.92 million to the heirs without paying any federal estate tax, as of 2023. But if your loved one is leaving you more than $12.92 million, the estate could be hit with a 40% federal tax bill. The good news is there is no inheritance tax at the federal level. However, there are six states that currently employ a state inheritance tax: Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey and Maryland.1,2
Receiving an inheritance from a high-net-worth individual means you could be receiving physical gifts such as vacation properties, family homes, cars, antiques, jewelry, art and more. Should you decide to sell any of these valuables at a later date, you will be responsible for a capital gains tax. This taxes the difference in value (only if it is an increase) of the item from the day you received it and how much it sold for. As an example, if you received a vacation property that was valued at $500,000 and sold it three years later for $750,000, you would be taxed on the long-term capital gain of $250,000.
To avoid any tax pitfalls, you may want to discuss all of the tax implications receiving an inheritance could have in the upcoming tax year and later down the road with your financial planner or CPA as soon as possible.
Step 3: Keep Quiet About Specifics
When receiving a large sum of money, you could easily be tempted to post about it on social media, tell your friends and neighbors or discuss it with extended family. But resisting the urge to talk about your inheritance could be beneficial for several reasons. Making it well known that you’ve recently received a large sum of money could make you especially susceptible to unwanted business or investment pitches, or it could set an expectation that you’re willing and able to pay for friends and family in social settings (going out to eat, vacationing, etc.).
Additionally, especially in the case of high-net-worth families, wealth may not be distributed evenly among the deceased’s children and grandchildren. For this reason, you may not want to be too specific with your brothers, sisters, aunts or uncles with regard to how much inheritance you have received.
Step 4: Avoid Making Sudden Decisions
You may be accustomed to living a financially comfortable lifestyle, but almost no one is immune to the emotional excitement of receiving a large lump sum of money. But before you head to the car dealership or book an exotic vacation, stop and take some time to digest your new financial standing and think about your options. In the heat of the moment, you can be much more prone to making rash or unwise financial decisions instead of weighing your debt repayment or investment options.
Whether you get a one-time payout or payment over multiple years, you may feel a sense of sudden financial independence that entices you to quit your job or retire early. This is why working with a team of level-headed, unbiased professionals can help you make financially sound decisions that are not emotionally charged or impulsive.
Step 5: Pay Off Debt Strategically
Maybe your first instinct isn’t to purchase a fancy car or buy a beach house. It may be to pay off all of your debt – mortgages, car payments, student loans, credit cards, etc. This could be a good choice to make, but you want to be strategic about what debt you decide to pay off and which you end up keeping. For example, it may be beneficial to pay off high-interest debt such as student loans and credit cards. But for loans with lower interest rates, such as mortgages or auto loans, you may actually be better off using that money to invest instead. Because in some cases, the interest made on certain investments can be greater than the interest you’re paying the loan. Seeing as everyone’s unique financial standing is different, these options are best discussed with your trusted financial professional.
Making your inheritance last takes proper management, discipline and teamwork. As you move through the five steps above, remember to take your time and ask your team of trusted professionals any questions you may have. You may have spent decades accumulating a high net worth, but when it comes to handling a large influx of wealth, you may not have all of the answers. That’s why it’s important to take your time now to preserve your inheritance for years to come.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.