What should you do if you inherit a lot of money?
Posted on February 9, 2024 by Katherine Fox.
What should you do if you inherit a lot of money?
What should my priority be after inheriting a lot of money?
As a financial planner who specializes in working with Gen X, Millennial, and Gen Z inheritors, I understand the unique considerations and complexities that accompany a large inheritance.
Your goal is to ensure that your inherited wealth becomes a source of long-lasting financial security, prosperity, and positive impact.
Sunnybranch’s goal is to help you get there.
What are the first things to do after you inherit a lot money?
Take time to grieve, process, and decide what to do next
A lot of people will tell you that it’s required to take 6 months to a year after someone dies before you make any big decisions. That’s great general advice, but it won’t be a perfect fit for everyone. Your timeline may be shorter or longer depending on your financial situation and relationship to the person who died.
Identify your most important financial goals
Please don’t listen to a financial advice industry that tells you the “right place” to use your inheritance. You are a unique person with unique goals. Build a list of your financial priorities to start creating a plan to manage your inheritance in your way.
Build a team of trusted professionals
If you inherited from a multi-million dollar estate, you are going to need professional help. Your team could include an attorney, CPA, and a financial advisor who works with inheritors. Depending on what you inherited, you may also need to add in other advisors who can help value or sell illiquid assets.
An inheritance is a moment-in-time event, but it changes the rest of your life. Once you feel confident in your financial goals and have a good team around you, it’s time to start building a plan to manage and grow inherited wealth in alignment with your long-term goals and personal values.
What should you do if you inherit a lot of money?
Ready to get started managing a large inheritance and don’t need to read the whole post?
5 steps to build a long-term plan to manage and grow inherited wealth after inheriting a lot of money.
1. Take inventory of everything you inherited.
Make a list of everything you received and identify the current value of all inherited assets, including:
Cash and bank accounts
Liquid investments
Real Estate
Illiquid Investments
Collectibles
Valuable personal property
2. Understand the tax consequences of your inheritance.
Make sure you understand the step-up in cost basis for inherited assets. In many cases, the value of inherited assets is adjusted to their fair market value at the time of the decedent’s passing. This can reduce or eliminate the impact of capital gains tax when these assets are sold.
You also need to learn about the withdrawal rules for inherited IRAs. Most beneficiaries are required to fully empty inherited IRAs within 10 years after a decedent passes away. All withdrawals from a traditional IRA add to your taxable income, creating a tax headache for those who inherited large retirement accounts.
3. Decide which inherited assets you want to keep and which you want to sell.
Some assets, like real estate and illiquid investments or collectibles, may be difficult to sell quickly while stocks, bonds, and mutual funds or ETFs are easy to liquidate.
Your decision on what to sell and what to keep should be based on your overall need for money as well as your investment preference and relationship to inherited assets.
4. Start working with a financial advisor who specializes in inherited wealth to build a plan to manage your inheritance.
A financial advisor can review your values, risk tolerance, time horizon, and financial goals. This review will help determine the appropriate allocation of conservative and growth-focused assets in your portfolio, but also recommendations for the types of funds in which to invest.
Your recommended portfolio will look different depending on your unique objectives. Whether you are looking to generate income from the portfolio, grow principal to pass down for future generations, or keep saving for retirement, an advisor can help you align your inherited wealth with your values and financial goals.
5. Explore how you want to create positive impact after inheriting a lot of money.
If you inherit a lot of money, you are the recipient of a huge degree of privilege. When building a plan to manage your inherited wealth, don’t forget to consider the impact you want to create in the world around you. Whether it is through impact investing or personal, political, or philanthropic giving through a Donor Advised Fund or private foundation, include an exploration of how to create positive impact with inherited wealth as your comfort level with managing wealth increases.
Wherever you are, having a financial advisor who specializes in impact investing and charitable planning can help you build out your values, impact priorities, and philanthropic plan.
After inheriting a lot of money, take time to assess your mental state and understand the money story you associate with your large inheritance.
After inheriting a lot of money, you might be dealing with grief, family strife, or guilt over receiving a large inheritance.
Take stock of where you’re at and be honest with yourself - are you ready to start making decisions?
If not, that is 100% OK.
You need to make big decisions about a lot of money. You want to be sure you’re clear-headed and ready to weigh your options before you move down a path that can’t be changed.
Next ask yourself:
What is your relationship to inherited wealth?
Are you proud of how your family built wealth and managed the dynamics between family and money?
Most people can’t check both of these boxes.
Suppose you have issues with the source of your family’s wealth or the way that money was discussed and used while your parents were alive. In that case, you may need to take the time to think about how these issues will affect your relationship with money before you make any major decisions.
Think about these questions:
Do I associate money with shame, guilt, or other difficult emotions?
Did I learn what I need to know about money growing up?
Do I disagree with the way my family earned its wealth?
Do I want to manage my money the way my parents did?
Depending on your answers to these questions, you may want to take space to think and reflect before taking the next steps to manage your inheritance.
You want to be sure that you are using your inheritance to build something for yourself, not making instinctive decisions that push you further down the path that your family laid out for you.
LEARN MORE ABOUT MANAGING AN INHERITANCE
After inheriting a lot of money, you need to identify your biggest financial goals.
After inheriting money, take the time to identify your biggest life and financial goals. These goals might include:
Paying down debt
Moving into a different home
Going part-time at work
Pursuing an old passion
Quitting your job
Going back to school
Taking a dream vacation
Spending more time with loved ones
Knowing your goals will let you start to build a plan to manage your inheritance in line with your vision for the future - not spend it all tomorrow on something you’ll regret in a year.
Whether you quit your job, move to a new city, buy a luxury car, or decide to give your wealth away to charity, your decisions now will have ripple effects down the road.
While identifying your biggest life and financial goals, revisit your core values and consider the personal and community impact you want to create with your newfound wealth.
Just because you have greater financial means, it does not make you a fundamentally different person.
Ask yourself:
Where did I value investing my time, energy, and resources pre-inheritance?
How can I amplify that enjoyment with increased resources?
What about my life pre-windfall will I miss?
Remember the grass is always greener on the other side. While wealth creates opportunity and freedom, it doesn’t guarantee a worry-free existence.
Your plan for the future should incorporate the freedom your new wealth provides while leaving space for the values, passions, and relationships you have spent your life building.
After inheriting a lot of money, you should build a team of professionals to help you manage a large inheritance.
Receiving a large inheritance often requires building a team of professionals including a lawyer, CPA, and a financial advisor who specializes in helping inheritors.
Depending on the size and complexity of your inheritance, as well as the family dynamics involved, you may need to ask for help with the following:
Filing estate tax and estate income tax returns
Settling an estate
Understanding the tax consequences of your inheritance
Managing the probate process
Liquidating complex assets held by the estate
Understanding the terms of a trust
Navigating a difficult relationship with a trustee
Family disputes over estate settlement and inheritance
How to invest your inherited wealth
How to build a long-term plan for inherited wealth that supports your future goals
Finding these advisors can be a difficult and confusing step to navigate, especially for those who don’t have a network of wealthy friends or family to ask for referrals.
Many people in your situation are taken advantage of by unscrupulous professionals looking to advance their self-interest.
As you interview professionals, ask the following questions:
What is your experience dealing with people in my specific situation?
Do you have experience helping clients with the tax/legal codes in my state?
How are you compensated? How does that compensation change depending on how much help I need?
What control, if any, will you have over my wealth?
Can you provide references from current clients?
What other types of professionals should I be working with?
Are you a CFP®, fee-only advisor, and/or fiduciary? (Financial advisors only)
When you find a professional you like, ask them for references of other advisors who can round out your team.
Let’s take the next step together
Understanding what happens when you inherit a lot of money is not easy. Beneficiaries can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, you can download The 20 Inheritance Terms you Need to Know, or reach out to Katherine Fox, CFP® and CAP®, a financial planner for inheritors to learn how Sunnybranch can help you build a plan to manage a large inheritance.