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We are in the midst of the Great Wealth Transfer, experts say — a predicted titanic pass-down of assets from older generations to Gen X, Millennials and Gen Z. According to financial research firm Cerulli Associates, $124 trillion will change generational hands through 2048.
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That said, not everyone is going to get a staggering amount of money — or any inheritance at all, frankly. (Much of this wealth is concentrated in a small pocket of the population.)
But if you’re inheriting wealth, you’ll have choices to make. Planning ahead can help you avoid costly mistakes.
“This is something that’s really powerful, that could really propel your financial security,” says Fahmin Fardous, a certified financial planner with Zenith Wealth Partners in Morristown, New Jersey. “Let’s look at where you are, and let’s look at what your goals are in life.”
Prepare before the inheritance
Receiving large sums of money and losing a loved one are both things that can throw you for a loop, emotionally and practically.
“Grief can lead to rushed decisions,” says Scott Bishop, a CFP and co-founder of Presidio Wealth Partners in Houston.
Establishing goals, understanding inheritance terms and researching tax implications can put you in a better place to make smart choices, he says.
In other words, laying the groundwork now prepares you for the hard work later.
“Emotionally, I often see people swing to extremes — either refusing to spend any money because it feels like ‘blood money,’ or spending too quickly because they don’t feel deserving of it,” says Mitchell Kraus, a CFP with Capital Intelligence Associates in Santa Monica, California.
No matter what emotion you feel at the time, it’s probably normal, whether it’s happiness, sadness or general overwhelm.
“I’ve seen stress, I’ve seen excitement,” Fardous says. Many clients have never had this kind of money before, she says, and they don’t know what to do with it.
Avoid common inheritance mistakes
All those feelings can make it hard to act thoughtfully on your newfound wealth, particularly if it’s a life-changing amount. One thing you shouldn’t do, Fardous says, is start mentally spending the cash.
“Whenever I see someone who’s received a windfall, they think of this wish list they’ve had,” Fardous says. “And this money is getting spent in their head before it’s even hitting their bank account.”
That can derail long-term security before the inheritance has even fully settled.
“Don’t bank on an inheritance until you have it,” Kraus says.
Other people seek professional advice (good!) but end up with financial pros who try to sell them lots of high-commission products (not ideal!).
If you consult with a professional, consider looking for a fiduciary, which means they’re legally bound to do what’s best for the client, Fardous says. Be sure you understand the difference between a fee-based financial planner, who receives commissions for recommending products, and a fee-only planner, who is paid only by clients.
People sometimes respond to pressure from friends and family by taking hasty action before they’ve had time to really think about it.
Kraus recommends telling people you’re taking a “90-day decision-free zone” — a period where you don’t make any irreversible financial moves.
“It gives you a chance to reset, to think about what’s going on and how it’s happening, and that takes a lot of the pressure off,” Kraus says.
Have the hard conversations early
It’s helpful to know what’s coming your way so you can prepare for taxation and distribution. If you’re inheriting an IRA, there are rules about when and how you must take distributions from the account. There may be taxes due on what you’re receiving.
If you have the kind of relationship with your loved one where you could discuss what you might be inheriting, do it, Kraus says.
“I can’t tell you how many families I see where the parents are going to leave a lot of money for their kids, but their kids are so worried about the parents not being able to get by, they’re saving money in case their parents need help,” Kraus says. “So having those conversations ahead of time can help.”
Consider asking what you might be inheriting — money, property, investments — and whether there are any restrictions on the assets, Kraus says.
Make a plan for inherited wealth
After taking some time to absorb the situation and your emotions, experts say, there are a few priorities to consider.
Consulting a professional about your tax liabilities should be one of your first steps, Bishop says. After that, think about emergency savings and debt.
“We don’t want to allocate anything toward anything else without you having an emergency fund — three to six months in high-yield savings — then making sure you don’t have any high-interest debt,” Fardous says.
Then consider your goals. Do you want to put money toward your children’s college education, buy a house, bump up your retirement nest egg?
“The first thing you don’t want to do is go out and buy three Ferraris,” Bishop says.
Think about what’s important to you, what this money means for you, he says. Where do you want to go? Does this inheritance mean you can retire early? Would you want to retire early?
“Think of it as an opportunity to reset your life,” Bishop says. “Big checks invite big mistakes. It’s important to slow down, have a plan and then execute.”
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Kate Ashford, WMS writes for NerdWallet. Email: kashford@nerdwallet.com. Twitter: @kateashford.
The article How to Prepare for the ‘Great Wealth Transfer’ originally appeared on NerdWallet.
