By Erin Hadary, CERTIFIED FINANCIAL PLANNER™ professional and CERTIFIED FINANCIAL TRANSITIONIST®
I work with many people who inherit millions of dollars. Many of them find the windfall of money to be exciting and overwhelming, but they lack the knowledge and experience to develop a comprehensive financial plan.
To help them overcome their concerns, I spend several hours over multiple weeks understanding the needs of each person and couple to fit their needs. After years of experience working with people who have suddenly inherited so much money, there is a process that should be put in place to make the most of their inheritance.
If you have recently inherited a lot of money, here are four recommendations to consider:
1. Dream Big and Create a Wish List for Your Inheritance
I’ve worked with clients who quit their job and promise to pay for all the children in the family to attend any college they want, provide seed money to start a business, and help with getting new cars and lavish family vacations. Depending on the circumstances, such goals can be achieved, but in this commonly occurring scenario, a long-term plan could be beneficial.
Start by developing your list and estimating the cost of each item. While putting a budget together may sound borderline ridiculous for someone with $10 million+, during the initial three years after receiving an inheritance, it will likely be a good idea to refrain from making any major purchases until an annual budget and planning for taxes both federal and states taxes are accomplished.
Most people want to quickly upgrade their lifestyle with a newer, larger home. The key here is the wise use of your cash.
For example, a person living in a comfortable home that may be valued at $800,000 may want to move to a larger home costing several million dollars. Instead of writing a check for $3 million for a home purchase, consider looking at alternative solutions to achieve the goal of upgrading your home, including a down payment and a mortgage loan. This alternative strategy should include long-term tax planning, with factors such as tax deductions for mortgage interest that should be considered.
2. Develop an Investment Strategy
With interest rates expected to continue rising and a possible recession looming, determining how to build a portfolio of stocks and bonds customized for your personal risk tolerance is an essential next step. For example, buying high-quality bonds with maturity rates between two and 10 years could provide a solution for some clients who want to earmark money for very specific short- and intermediate-term goals.
At the same time, we want to grow the money in your inheritance while taking inflation into account. So, it may make sense to invest some money in the stock market today to take advantage of lower prices. Each individual’s investment strategy must be tailored to meet their goals and needs, so take the time to create an investment policy statement that helps you act in a long-term strategic manner.
3. Review All Insurance Coverage to Mitigate Your Risk
People who have recently inherited a lot of money need to protect it with the right amount of insurance. Here’s an example of why.
If a wealthy individual causes a car accident and people are injured or die, there is often a possibility of lawsuits being filed by attorneys on behalf of the injured parties, where damages can sometimes reach millions of dollars.
The same is true for a new or second home. Especially because home values have skyrocketed in the past two years, it’s easy to be underinsured. It is important to consider a homeowner’s policy to help cover the cost of rebuilding if there is a partial or total loss of the property. For the couple who bought the $3 million dollar home, their premiums will likely be significantly higher compared to a less expensive home. Seeking out guaranteed replacement cost coverage has helped my clients here in Colorado after the recent Marshall fires that took their homes swiftly.
While no one wants to pay more for insurance, the focus should be on protecting the property for its full value – not saving a few hundred dollars on annual premiums. One way to achieve the proper coverage without overpaying is by increasing to higher deductible. For many of my clients, we talk about increasing the current deductibles up to $10,000 in exchange for the best possible protection on the property.
4. Estate Plan to Protect Your Wealth
Many people with new wealth may want to consider estate planning with a trust. However, there are many types of trusts, so determining the right type requires customized planning for your specific needs.
In 2022, an individual can leave up to a $12.06 million estate to the next generation without federal estate tax. This amount is scheduled to sunset in the year 2026 unless Congress makes changes. The exemption will revert back to the $5 million exemption (adjusted for inflation).
There are several common estate planning techniques I help my clients understand. These include:
- Plan to avoid having your estate end up in Probate Court at death by setting up a Revocable Living Trust and transferring assets to others now. Many people are surprised to learn that without smart planning, an inheritance to a spouse and or heirs could be tied up in courts for months or years while attorneys charge large fees to navigate this process.
- Make direct payments to medical and educational providers on behalf of family members you want to help.
- Gift the maximum annual gift exclusion ($16,000 per person in 2022)
- Finally consider creating a lifetime gifting strategy, after you determine you have enough to live on in your lifetime.
Reach Out for Guidance
If you have questions or would like more information about planning for your new inheritance, feel free to contact me at the HadaryTeam for life transition guidance. We offer a free consultation to discuss how a comprehensive financial plan can enable your wealth to grow.
© 2023 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly-owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Trademarks and copyrights of materials referenced herein are the property of their respective owners. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.
