A 2012 study by Ohio State researcher Jay Zagorsky found that about one-third of Americans who receive an inheritance have negative savings within two years of getting their money. Even more alarming – nearly one-in-five of those lucky enough to inherit $100,000+ either spend, donate and/or simply lose it all within that same time frame. If you are about to receive an inheritance, there are several steps you can take to ensure your funds last longer than a few short years.
Don’t Make Any Hasty Decisions. Once you receive your money, don’t make any hasty decisions about what to do with it. Instead, park the funds in a safe place such as a savings or money market account until you have had enough time to put together a long-term financial plan. If you don’t already have one, set up an emergency fund that will cover six months of expenses. Further, if you are married, you should decide early on if you want to keep your inheritance in your separate name or place the funds in communal account with your spouse; as you can imagine, this is complex decision for many reasons! If you are considering giving some of your inheritance to your children, be advised there may be gift tax or negative income tax consequences.
Inherit a Traditional IRA or 401(k)? Income Tax Planning is Strongly Encouraged! If you have inherited a traditional IRA or 401(k), any withdrawals you make will be included on your own tax return as ordinary income. Therefore, it pays to be strategic in determining how you will liquidate these accounts. Ask your estate planning attorney and/or accountant about your ability to minimize the income tax consequences by only taking the minimum annual distributions as required by law (and leaving the balance invested inside of the inherited IRA).
Still Working? Put Away More Towards Your Retirement. If you are working and are not contributing the maximum permitted amount to your 401(k), strongly consider bumping up your plan contributions (especially if you are not meeting your employer’s match). If your employer does not offer a 401(k), funding an IRA is a solid second option.
Hire a Team of Professional Advisors. You will need a team of professionals to help you develop long term plans for your inheritance. A financial advisor will help analyze your current finances and build a solid financial foundation to include investment advice, insurance (life, long term care, and liability), credit and debt management, college savings, and retirement planning. An accountant will help you determine cash flow and minimize capital gains and other income taxes. An estate planning attorney will help you create or update your estate plan (almost everyone could benefit from a will, revocable trust, advance medical directive and durable power of attorney), decrease or eliminate federal estate taxes, set up a gifting strategy, meet your charitable goals, create a family legacy, and protect your inheritance from creditors, predators, and lawsuits.
If your inheritance is large enough, it has the potential to last your lifetime. Don’t go it alone. We are here to answer any questions you have about receiving, growing, donating, protecting and ultimately passing on your inheritance to your loved ones.