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If you happen to become the beneficiary of a large wealth transfer, don’t be surprised when everyone around you suddenly starts talking like they are a financial expert. You’ll likely get plenty of advice about what to do with your money. But who do you listen to? Who can you truly trust?
When deciding what to do with inheritance money, allow us to give you some free, no strings attached advice.
1. Hire the Right Advisor
When you hire any expert, you want them to be well qualified for the job at hand. Same is true for a wealth advisor. Maybe you’ve never sought out professional financial advice before, but you know the complexity of your new inheritance is out of your depth of knowledge. Maybe you already have an advisor—or the person you’re inheriting money from had an advisor—but are wondering if they are still the right person to help you.
Here are specific qualities a well-qualified wealth advisor should have:
- Someone who can help you effectively devise a long-term wealth plan. A financial planner (we highly recommend a CERTIFIED FINANCIAL PLANNER™, or CFP®) can help you understand your newfound wealth in the context of your life and goals. They will look at your whole picture—such as cash flow, taxes, risk management, and trust and estate planning—and help you prioritize what actions to take. They will also help you understand how your inheritance impacts your long-term probability of financial success.
- Someone who can help you develop an investment strategy that aligns with your wealth plan. An investment manager (we highly recommend a Chartered Financial Analyst, or CFA) should know the ins and outs of the market, but they should also be constructing and managing your investment portfolio in line with your overall wealth plan. If they are recommending investment strategies in a vacuum without first understanding your needs for income or distributions from your portfolio and your appetite and capacity for risk, or aren’t explaining how they get paid, those are red flags.
- Someone who is a fiduciary. An advisor who is held to a fiduciary standard (as opposed to a suitability standard) means they are required to act in your best interest. They will understand your unique circumstances and give you personalized advice accordingly, rather than broader advice that is just suitable to anyone in your age or net worth range.
- Someone well-connected with other industry professionals. Managing a substantial amount of wealth requires more than just investment and planning prowess. A quality wealth advisor can help you recognize any gaps in your financial picture, connecting you with experts such as trust and estate attorneys, accountants, and insurance experts as needed.
- Someone patient. Don’t hurry into any drastic decisions before talking to your wealth advisor. Wealth benefits from discipline, patience, and time, so it’s never good to work with someone who tries to rush the process.
2. Carefully Vet Advisor
If you’re on the receiving end of a financial windfall, beware of wealth advisors who pounce on the prospect of getting your funds in the door quickly and invested before understanding your big picture. Take your time to interview advisors (come prepared with your own questions to ask) and get to know their philosophy and approach.
This isn’t always the most pleasant part of the process (you may have to challenge their viewpoints, as well as your own), but finding the advisor you are most comfortable with is a critical step for long-term success. In the end, hiring a wealth advisor comes down to trusting someone with your hard-earned money and this gift of an inheritance. You want to make the right choice.
Also, don’t stay with your family’s legacy advisor just because “that’s the way it’s always been done”. Ask yourself: Is this advisor providing the experience you’re looking for in a wealth manager? Are you communicating well? Does their investment philosophy align with yours? Do they have a multi-generational team of experts? Do they value a relationship with you? Do they understand your unique financial picture? If the answer to these questions is “no” then it’s ok to look around for another advisor that better aligns with your needs.
3. Understand Your Inherited Assets
Many beneficiaries inherit assets in a variety of ways—retirement and non-retirement investment accounts, tangible items, real estate. Each of these requires a slightly different approach to managing the asset and what decisions need to be made.
Non-Retirement Investment Accounts
Sometimes called “taxable investment accounts” or “brokerage accounts,” these accounts often contain liquid (i.e., easy to sell) investments such as stocks, bonds and mutual funds. If it’s a good allocation that is in line with your own personal portfolio goals and needs, then you can of course continue to own the positions as they are. But don’t just assume the portfolio is fine—get a second opinion.
If you do decide to sell any of the holdings, you’ll benefit from a “step-up” in cost basis, meaning that you’ll only be taxed on any increase in value that occurs between the date of the previous owner’s death and the date of your sale.
Retirement Accounts
Navigating the various rules and regulations around retirement accounts can be confusing. (And it only got more complicated with the enactment of the SECURE Act in 2019 and SECURE Act 2.0 in 2022). A good wealth advisor will know these rules and help you plan accordingly.
The SECURE Act divided designated beneficiaries on retirement accounts into two categories: eligible designated beneficiaries and non-eligible designated beneficiaries. Eligible designated beneficiaries can stretch distributions from the inherited retirement account over the lifetime. Non-eligible designated beneficiaries must take all the funds out of the retirement account within 10 years of inheriting the account.
So which group do you fall into?
Eligible designated beneficiaries include the spouse, disabled individuals, chronically ill persons, individuals who are not more than 10 years younger than the decedent (think siblings or a non-married partner), and minor children of the decedent (but only until they reach the age of majority, which varies by state).
Don’t see yourself in this list? Then you are probably a non-eligible designated beneficiary and you’ll need to take all the funds out of the retirement account within 10 years. Determining how fast to do this—and what’s the minimum amount you need to take out each year—is where a good wealth advisor will be your guide.
Antiques, Art, Jewelry & Collectibles
If your inherited assets include antiques and heirlooms, you’ll want to get the collection professionally appraised by a reputable third party. If you decide to keep the items, an appraisal is a necessary first step to insuring valuable pieces. Typical property and casualty insurance policies only insure these items up to a set dollar amount. If you want to insure an item that is worth more than the standard amount, you will need to add the item to your insurance policy using a rider that specifically identifies the piece and its value.
House
As a beneficiary, receiving real estate may feel like both a blessing and a curse. Homes are an especially emotionally charged asset to inherit (particularly if it’s the home you grew up in), and it can be hard to balance your sentimental attachment to the property with the financial aspects of managing it. Fortunately, compared to antiques and collectibles, real estate market data is plentiful, so you’ll at least have an easier time ascertaining the resale value of the home.
If you do decide to sell the property, you’ll benefit from a “step-up” in cost basis (just like non-retirement investment accounts). If you choose to live in the house, a portion or all of future capital gains could even be excluded from taxes altogether (provided you meet certain ownership and use conditions, including the use of the property as your primary residence for at least two out of the past five years).
You should also factor in the various costs that come with keeping up the home such as maintenance, HOA fees, property taxes, and other unexpected expenses that could quickly add up.
4. Spend Your Inheritance Meaningfully
With this inheritance (especially if it was a windfall), you may be asking yourself: What do I use this money for? Our advice: think back to the person you inherited the wealth from. Did they ever talk to you about the purpose of the wealth they were passing down to you? If not, what was it that they valued? Education? Traveling the world? Starting a business? Philanthropy? More time with family? This can be a starting place for figuring out how to spend your inheritance in a meaningful way.
Wanna Make Your Inheritance Last?
The last thing you’re probably wanting right now is to squander your inheritance due to poor planning and mismanagement. That’s not what most people set out to do. But the reality is that it can—and often does—happen.
If you’re wanting to make your inheritance last for your lifetime—or even for multiple generations—then you need a wealth plan that weaves together your goals, income and expenses, tax picture, investment strategy, risk management, estate plans, and stress testing “what if” scenarios.
A wealth plan is also not a static document made at a singular point in time. Rather, a good wealth plan takes a long-term view and evolves every year as your wants and needs change.
Although this may certainly feel like a tall order, a team like Monument Wealth Management can be well suited to help you with this challenge. Our team of credentialed and creative advisors will help properly frame risk, remove hassle, and ultimately empower you to have more control over your time and options. We take a straightforward, no B.S. approach to simplifying complex topics without a bunch of industry terms and jargon. If you’re ready to use your inheritance to begin building a foundation for yourself and/or future generations, reach out to us—where there’s a will, there’s a way. See what we did there?
Related: How To Manage Money in College