We are on the eve of the greatest transfer of wealth in history. Most baby boomers are now well into retirement age and are finalizing decisions about their will or estate plan. As a result, the coming years will see an unprecedented amount of money being passed down to younger generations in the form of an inheritance. Families receiving an inheritance need to plan carefully in order to avoid some of the common pitfalls.
Here are some important tips to keep in mind:
Pray. Ask God to guide you and keep you centered.
As Christians, we can always start by talking to God. You can express gratitude and invite the Spirit to guide you in how you might best steward these newfound resources.
Learn about and resolve any tax obligations.
How inheritances are taxed vary by state, type of account, and estate size. For example if it's an IRA that you've inherited it's important to leave it in the IRA to avoid a potentially very high tax bill. The first thing you should do is understand the tax implications of receiving the inheritance. A financial planner or CPA can help you navigate this in the most efficient way possible.
Park the cash in a high-yielding savings account.
An inheritance often arrives soon after a loved one has passed away. It’s important to give yourself the appropriate space to grieve, and best not to make any major financial decisions until you have a clear mind and heart. As long as doing so won't cause adverse tax consequences, temporarily keep the money in a high-yield savings account that is FDIC insured until you are in a healthy place to make further decisions. Putting it in your everyday checking account will too easily tempt higher spending and is unlikely to earn as much interest.
Remember that each dollar you inherited is worth the same as every other dollar you’ve earned.
Unfortunately, statistics show that inherited money gets spent substantially faster and more recklessly. Avoid impulsive purchases. Have a thoughtful plan for each dollar before you spend it. If you inherit $20,000 and use it to buy a boat, you’ve now increased your expenses as you’ll need to maintain it, store it, fuel it, insure it, etc. This can create financial hardship down the road.
Don’t change your priorities.
If you tithe 10% then don’t stop now. If you have a goal to become debt free then treat this as an opportunity to accelerate your plan! Do not allow this windfall to change your fiscal habits. You’ll otherwise leave yourself in a bad spot once the inheritance runs out.
Set your priorities.
If you don’t know your priorities then there isn’t a better time to start listing them out than right now. A financial planner can help you make priorities and set financial goals that are right for you. Generally, consider an order as follows:
- Satisfy high-interest debt like credit cards and perhaps student loans
- Shore up your emergency fund – set aside about 6 months of living expenses
- Increase your contributions to retirement accounts
- Pay off other debt – mortgages, lines of credit, car loans, etc.
- Consider refinancing your primary mortgage – a shorter payback period can mean a better rate and building equity more rapidly.
Establish or update your estate plan.
Do you have a will or estate plan established? If you’ve been putting it off, now is an excellent time to start as your financial situation has just change. If you have one established already, this is a unique reason to revisit your plan and update it if needed.
Too many beneficiaries of an inheritance fall into temptation or otherwise mismanage their lump income. Too often this leaves them with an inflated lifestyle and without the financial wherewithal to sustain it. Don’t fall into this. Go slow, keep your priorities in check, and have plan. A financial planner can help you through everything from both a tax standpoint and implementing the right plan for you.
About Wacek Financial Planning
Founder, Ben Wacek, is a fee-only, Certified Financial PlannerTM who has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective, using Biblical principles. If you’d like to learn more about Wacek Financial Planning, please visit www.wacekfp.com.
Photo courtesy of NeONBRAND on Stocksnap.io