5 Things To Do With Inherited Wealth
5 Things To Do With Inherited Wealth
Learn five most common places inheritors of multi-million dollar estates should look to when building a plan to manage their inheritance.
Posted on March 12, 2024 by Katherine Fox.
5 Things To Do With Inherited Wealth
What can you do with inherited wealth?
“Can I…?”
The most common question I hear from inheritors is about what their new wealth will allow them to do.
Can I retire?
Can we buy a new house?
Can we travel more?
Can we dial back our work schedules?
There are a lot of things you can do with your inheritance. Deciding what you will do with your inheritance should be done with an understanding of the financial trade offs of putting funds towards one goal over another.
What is the first thing you should do after inheriting wealth?
Your first step is to make a plan for your inheritance. Whether on your own or in conjunction with a financial advisor, consider your most important financial goals now and in the future when planning what to do with your inheritance.
Don’t get tripped up by only focusing on your short-term priorities. Committing the bulk of a large inheritance to immediate needs or wants may be the right decision, but it can come with financial and lifestyle trade-offs down the line.
Explore how your current and future goals interact when planning for your inheritance. Want to spend two years traveling abroad? Go for it! But understand how it could affect your long-term work and retirement plans.
Stuck trying to identify your goals and figuring out where to put money first? Check out the below list for the five most common places I see inheritors putting their funds.
5 Things To Do With Inherited Wealth
Should you use your inheritance to pay down debt?
Paying off debt is one of the most common ways people use their inheritance. Aside from a low-interest rate mortgage, it is generally beneficial to get rid of outstanding debt when a large inheritance arrives. Student loans, credit card debt, auto loans, and personal loans are all easy targets to pay down or off with part of an inheritance.
The decision to pay off debt, and which debts to address first, hinges on two factors:
Your comfort level with debt
As long as they can comfortably make their payments, many inheritors don’t mind holding debt. Others don’t like paying more than they have to in interest payments if they have the money to pay off a loan.
If you don’t mind debt, are comfortably making your monthly payments and don’t plan to stop working, then you may be better suited to use your inheritance proceeds elsewhere. I would caution against this approach if the interest rate on long-term debt is 6% or higher, as your interest owed will get expensive.
Paying off a mortgage is a separate calculation from paying off other debt. The decision will depend on the size of the mortgage, your interest rate, your comfort level with holding debt, and the freedom being mortgage-free would provide to you and your family.
2. Your current income and retirement goals
For the crowd that is comfortable with their current debt loads and wanting to take a closer look at the cost versus benefit of paying off debt, a long-term view is helpful.
If you plan to keep working after receiving your inheritance, the question of paying down debt may be less immediate. This should allow you the freedom to understand how paying down debt now may affect your future retirement goals.
Paying down debt frees up your current income but it means you are investing a smaller piece of your inheritance in the market. The investments you make with your inheritance may generate less income for you when you stop working. This will depend on the size of your inheritance and your risk tolerance.
Should you use your inheritance to buy a house?
It’s easy to feel happy in your house until you receive a multi-million dollar inheritance and start daydreaming about what you could afford. If you receive a large inheritance and are wondering if you should buy a house with inheritance money, ask yourself the following questions:
· Did I have plans to move anyway?
· Do I fully understand all the costs associated with moving into a bigger/nicer house and/or moving to a better neighborhood?
· If I don’t move, what could that money provide?
If you are renting instead of buying, this is an easier question to answer. The benefits of homeownership for building generational wealth are well-documented. If you have wanted to buy but haven’t had the resources, buying a house with inheritance money may be your opportunity.
If you were planning to move into a new home but were waiting until you had a higher income or saved a larger down payment, getting an inheritance could be a great time to buy a new house.
Even if you were already planning to move, the switch to a larger house in a “nicer” neighborhood should be well-researched. Consider the known (property tax, insurance, maintenance) expenses associated with a larger house as well as the unknown (more expensive social engagements, keeping up with the neighbor’s yards/holiday decorations, peer influence on the types of hobbies you do and vacations you take) expenses that can inflate living expenses with the move to a different home.
Depending on the size of your inheritance and the value of the home you are considering, it may be a moot point. But too many inheritors and other recipients of sudden money have blown their wealth by buying a house, boat, car, plane, et cetera that is expensive to maintain and over-estimating the ability of their remaining wealth to pay for those expenses.
Think about what you could get if you didn’t move. Would you be able to retire earlier? Travel more? Give back to non-profits at a more significant level? These are the questions all inheritors should consider before making any major decisions.
“Increasing charitable contributions is one of the most critical pieces of entering a new level of wealth.
Building a plan for your inheritance should incorporate a simple blueprint to increase your philanthropic, personal, or political giving after receiving an inheritance.”
Should you use your inheritance to provide for your heirs?
There is no downside for building a plan around how your heirs will inherit wealth. Those wondering what to do with their inheritance should educate themselves on the many options available and consider the following funding vehicles:
529 accounts
529 plans are tax-advantaged savings accounts offering tax benefits when used to save for higher education expenses. Contributions to 529 accounts grow tax free, and funds are nontaxable when withdrawn for qualified educational expenses including tuition, room and board, books, and other expenses at trade schools, 4-year colleges, 2-year colleges, and graduate schools.
Recipients of large inheritances may consider taking advantage of tax laws to “superfund” 529 accounts for young children. This benefit lets you make 5 years of contributions at once without any effect on your overall gift tax exemption. In 2023, a couple could contribute $170,000 to each child without reducing their lifetime exemption.
UTMA custodial accounts
Uniform Transfers to Minors Act (UTMA) accounts are established under state laws, allowing a designated custodian to manage assets for the benefit of a minor. These accounts can be fully invested in the stock market and are the savings tool of choice when 529 accounts are already funded. Parents who are also the custodians of UTMA accounts oversee the management of UTMA assets until the child reaches the age of majority, generally 18 or 21, depending on the state.
Although UTMAs don’t offer the tax benefits of 529 plans, they provide greater flexibility to allow heirs to use funds for any future needs and are a useful tool for inheritors looking to plan for their children’s future.
Should you use your inheritance to give back?
Increasing charitable contributions is one of the most critical pieces of entering a new level of wealth. Building a plan for your inheritance should incorporate a simple blueprint to increase your philanthropic, personal, and/or political giving after receiving an inheritance:
Give more to organizations you already support
If you already make sporadic, monthly, or annual contributions to specific non-profits, increase these gifts or add a significant one-time donation.
Connect with new organizations
Survey your friends, family, and greater community about the organizations they support. This may include working with your financial advisor or a philanthropic advisor to help you target your charitable goals and connect with organizations working within your target impact areas.
Give at an uncomfortable level
There is no one “correct” amount to give, but most people could be giving more. Push yourself to give at an uncomfortable level rather than designating a small set percentage of your income or net worth as your annual target.
Learn the new ways wealth allows you to give
Inheriting wealth may change the way you give. Writing checks and making donations with your credit card may give way to donations of appreciated stock or other assets. You may also consider setting up a Donor Advised Fund or private foundation to support your annual philanthropy.
On the other end of the spectrum, some inheritors don’t want the burden and privilege their wealth provides and prefer to build a plan to give away their inheritance through a combination of gifts and below-market investments in companies and nonprofits working to create positive change. If this is you, I recommend reaching out to an investment advisor who can help you build a plan to give your inheritance away to causes you support.
The other piece of giving back after receiving an inheritance is engaging in political advocacy work and supporting political candidates who share your views and theory of change. The greatest opportunity to create real change is to support nonprofits doing critical work and engage with political advocacy groups and politicians who support creating systems-level change in service of a more just and equitable society for all.
Should you use your inheritance to invest in the stock market?
After making decisions on paying off debt, planning for large purchases, setting aside money for your heirs, and giving wealth away, the real fun starts.
Your work throughout the previous steps helped clarify what you need from invested wealth. You have started thinking about your retirement goals, how much you will need annually to support major expenses, and what you want to leave to your heirs.
All of this information will factor into your risk tolerance or willingness to expose your investment portfolio to market fluctuations as you build a plan for inherited wealth. You may decide your portfolio should grow as much as possible and you are willing to take the commensurate amount of risk to try for that growth. Or you may decide you want your portfolio to be more stable and focused on providing income. Whatever the case, your risk tolerance will inform how your portfolio is constructed.
After deciding on your portfolio’s risk tolerance, there are two key tips for success in investing:
Emotionally prepare for market downturns
Stay invested for the long term
Successful investors are mentally prepared for market dips and have a plan to stay invested, or even add to investments when the markets are down. This mental preparation combined with a plan to buy and hold investments with a long-term (20+ years) perspective, has proved historically to reward investors.
Inheritors can get into trouble by (1) trying to grow investments too fast, taking on too much risk and leading to the possibility of significant losses or (2) panicking when markets are down and selling out of their investments, locking in losses and making extremely difficult to time when to re-enter the markets.
Let’s take the next step together
Understanding what to do with inherited wealth is not easy. Beneficiaries can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, you can download The 20 Inheritance Terms you Need to Know, or reach out to Katherine Fox, CFP® and CAP®, a financial planner for inheritors to learn how Sunnybranch can help you build a plan to manage, grow, and give your inherited wealth.
