by Ralf Sellig
Large Inheritance? What’s Next?
The loss of a loved one is often a difficult time. There are a mix of emotional and practical challenges that can, at times, seem overwhelming. The pressures can become even more complex if there’s a large inheritance.
We see this scenario a lot at Lucas Capital Management, so we wanted to address many of the considerations you will face if a large inheritance is coming to you.
In the immediate aftermath of a large inheritance, it’s important to understand that your financial outlook, and indeed all aspects of your financial life, are about to change. For many, this is a disorienting experience – what are the right things to do with the windfall?
It’s important that you take a breath before you start formulating a plan on how to proceed. Especially if your circumstances have just radically changed. Let the financial significance sink in so that you can intelligently deal with this life-altering event.
The most important initial step when receiving a large inheritance is to turn to a fiduciary financial advisor you can trust who has suitable expertise to provide sound advice. You may have friends and relatives who will bombard you with all sorts of advice, but tread carefully! You owe it to yourself to seek out impartial, expert advice that is not motivated by personal considerations.
Clearly understanding the right steps to take and how your choices will have profound consequences is key to making smart decisions with your newfound funds. A fiduciary financial advisor is trained to handle these kinds of challenges and has a legal responsibility to put your best interests first.
Looking for a fiduciary financial advisor in Central New Jersey? Contact Lucas Capital Management to see how we can help.
Notwithstanding the circumstances and the events that resulted in your inheritance, understand that this is now your money. It is your responsibility to deploy your inheritance. Yes, you may be inundated by requests from relatives, friends, charities, foundations, creditors and others for some of your money. Be wise.
Your response to these requests is often emotional – some might make sense, many might not. This is one of the reasons you can benefit from hiring a professional advisor. When open hands come your way, explain that you and your advisor are working out your plans. This will give you the time and space to calmly evaluate the many demands you might receive.
It’s also crucial to understand the taxes you may owe and the tax basis of your inherited assets.
For example, if you inherit stock, you must understand whether its basis was stepped up. If so, the cost basis of the stock is reset to the price on the date of inheritance. Typically, this new price is higher than the original cost basis, which translates to smaller taxes when you sell the stock.
In addition, verify whether the funds are taxable. For example, proceeds from a life insurance policy or Roth IRA might be tax-free. Your financial advisor or tax expert can advise you on your tax liability and the options available to you.
When you receive a large inheritance, it’s wise to create a financial plan for the money. If you already have a financial plan, it will likely need extensive revision.
Your financial plan should encompass how to protect and grow your inheritance. It should consider the deployment of your inherited funds, including making investments, creating trusts, planning your estate, naming beneficiaries, minimizing your taxes and planning all other aspects of your financial future. A financial plan should be sound, holistic and tailored to your unique requirements. It should also include your long-term plans, such as retirement.
Be careful not to make immediate spending decisions. As mentioned earlier, you may hear from all types of people and organizations who have “helpful” ideas on how to spend your money. In addition, you may feel like a large inheritance is the occasion to make big changes to your life. Perhaps it is, but don’t rush.
Emotions can be detrimental to your long-term plans. Just read our recent blog post: Do Your Emotions Hinder Your Investment Results? Spoiler alert: They often do.
Let your financial advisor help you avoid hasty actions that can compromise the value of your inheritance.
One thing you may want to consider doing with your inheritance is paying off expensive debt, but not necessarily all debt.
Naturally, you don’t want to pay interest when you no longer need to. However, some debt is good. For example, you might have a mortgage with a low interest rate. Rather than pay off the mortgage, you can invest the money with the goal of earning more (after taxes) on your investment than you would save on mortgage interest.
Again, discuss your options with a financial advisor you trust.
If invested, the proceeds from a large inheritance should be diversified across many asset classes.
Diversification helps reduce risk because different assets have different returns at different times. One asset might rise when another one falls, thereby reducing the overall risk of your portfolio. Diversification and asset allocation should be age-appropriate and accommodate your tolerance for risk. Your financial advisor can help you formulate and execute a diversification plan to help protect your long-term wealth.
It’s crucial that you understand the risks and rewards when you invest your inheritance in financial instruments and products, such as annuities, stocks, bonds, mutual funds, exchange-traded funds, real estate and alternative assets. Always read an investment’s fine print before investing. Consider factors such as your ability to end or increase an investment.
Remember, a financial advisor who receives a fixed fee does not profit from selling you investment products. This is ideal because it helps avoid conflicts of interest. It might make sense to tie up some of your money in illiquid products, such as tax shelters, irrevocable trusts or life insurance. But make sure you understand the tradeoffs involved.
We’ve touched upon the major considerations that arise when you inherit sizeable assets. Naturally, we’ve discussed the important factors at a high level. The actual financial decisions you will make are highly personalized and specific to your circumstances. We hope we’ve convinced you to go slow, understand your various alternatives and to seek impartial advice.
A squandered inheritance cannot be reclaimed, meaning you have only one chance to get things right. While the possibilities may seem unlimited, especially at first, there are many risks out there that need to be understood.
There’s no substitute for careful, clear-eyed planning if you want to extract the maximum value from your inheritance.