Your Money: Five smart ways to maximize an inheritance

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Bruce Helmer and Peg Webb

Americans stand to inherit trillions of dollars over the next few decades.

In our culture, it’s assumed that more wealth equals happiness. But this isn’t always the case. Sudden wealth through an inheritance instills complex emotions, such as being paralyzed or fearful of making a mistake.

In addition to important financial planning, investment, and tax implications, it may also have an impact on your sense of identity and purpose. Here are five common-sense ways to make the most of an inheritance.

1. Take time to process your newfound fortune.

Sometimes when people come into an unexpected amount of money, they make impulsive decisions, like buying a new house or car, splurging on travel, or retiring early.

To resist making fast decisions, take stock of your emotions. How do you feel about how your inheritance is changing your circumstances? Are you joyful, sad, or feeling guilty? Are you worried about how your friends will view your good fortune? We often tell clients who inherit a substantial amount to wait a year before making any major money decisions.

There’s no harm in parking your inheritance in a money market account until you develop a financial plan that puts your inheritance into context. Remember that you don’t need to do this work alone. A CPA/tax preparer can also help you plan for the tax implications of sudden wealth. An experienced financial adviser can help you set your financial goals and can offer financial planning strategies tailored to your unique (and likely changed) situation. You also may need an estate planning attorney to update your estate plan.

Also, unless you really can’t stand what you do for a living, don’t use an inheritance as an excuse to quit your job. Keep your income flowing and preserve your Social Security benefits until you have a financial game plan in place.

2. Pay down debt.

Debt can be a source of major financial stress for many people. However, not all debt is the same: You need to distinguish between efficient and inefficient debt. Efficient debt is used to create wealth or add to skills that can improve future income and wealth accumulation (such as a home mortgage or college loan). Inefficient debt, on the other hand, generally carries a high-interest rate and is used to finance unproductive creature comforts that don’t lead to an improved financial situation.

Paying down debt can have a very positive effect on your mindset by giving you a sense of accomplishment. Generally, paying off high-interest credit cards, or credit accounts with low balances, can lead to more confidence in managing your debt load. Retiring debt and improving cash flow also could be a good use for part of your inheritance. And we cannot stress enough the importance of communicating with your spouse or partner! They may have a very different point of view about debt that you’ll need to reconcile.

3. Set realistic expectations.

What’s the first thing you would do if you suddenly inherited more money than you’ve ever had before? Want to take that bucket-list vacation? Renovate your home? Help family members afford college? It’s important to separate what you want to do from what you can do. You need to be realistic about covering your lifelong financial needs with an inheritance.

People sometimes think an inheritance will be enough to fully fund their retirement. But rising health care expenses and longer life expectancies are making that less of a certainty. You need to think through the elements of a financial plan, both with and without an inheritance.

4. Pay attention to new distribution rules around inherited qualified assets.

Depending on when you were born, and if the inherited funds were in a 401(k) or IRA, you need to know if the deceased had already begun taking required minimum distributions (RMDs) from these accounts. These now begin at age 73 and are scheduled to increase to 75 in the future. As a result of the passage of SECURE Act 2.0, there are two ways you can spend these assets — either as an Eligible Designated Beneficiary (EDB) or Non-EDB. EDBs can take distributions based on their life expectancies and include:

• A surviving spouse

• Minor child beneficiary (of the original account owner) under age 18

• A disabled individual

• A chronically ill individual

• Any other individual who is not more than 10 years younger than the deceased account owner

This so-called “stretch IRA” is no longer available to NEDBs, as NEDBs now must spend down an inherited traditional IRA or Roth IRA within 10 years. Remember, too, that inherited IRAs must be maintained as entirely distinct from other retirement assets. You also cannot contribute additional funds to an inherited IRA or convert an inherited IRA balance to a Roth IRA in your name.

Leaving children or grandchildren some percentage of a traditional IRA may no longer be as tax-efficient as it once was — it may be best left to spouses instead. Conversions of assets from a traditional to a Roth IRA may be appropriate depending on your current-year and future-year income and current and future tax brackets.

5. Consider how the inheritance may change you, both financially and personally.

Once you settle the affairs of the person leaving you money, you may find yourself in a very different position in life with respect to financial security. Your financial plan may need to be significantly overhauled or replaced. Sudden wealth may give you the ability to do things you never thought possible, or to support the people and causes that matter to you in unexpected ways. Celebrate and honor the memory of those who were able to make a big difference in your life, and enjoy the newfound freedom they were able to give you.

Finally, don’t forget the value a financial adviser brings to the table when you experience sudden wealth. When evaluating advisers to help you manage an inheritance, one of the most important characteristics to look for is the lack of conflicts, which is considered the industry gold standard.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO 830 AM on Sunday mornings. Email Bruce and Peg at Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.


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