Through what some are calling a “silver tsunami,” experts predict around $84 trillion in wealth to be transferred over the next two decades.¹ The impact will likely be felt across various sectors of the economy, and it will require careful planning and adaptation to address this demographic shift’s opportunities and challenges.
If you are receiving an inheritance, it may mean a shift in your financial life that requires careful consideration to efficiently fold this transfer of wealth into your goals, cash flow, estate plans, and tax planning. These tips can also be used by those experiencing wealth events in the form of career, the lottery, or investment windfalls.
Let’s look at what it takes to manage a significant windfall effectively.
How to Approach a Windfall
If you’re someone in a position to receive an inheritance or windfall in the coming years, you’ll want to approach the process with a clear head and strategic mindset. Otherwise, you could succumb to “jackpot fever,” the emotional and financial challenges that can arise from suddenly receiving a significant windfall.
Just think about the notorious “bad luck” big lottery winners have. Around 70% go broke, and 44% of winners burn through their winnings within five years.² In reality, it’s not bad luck that plagues these winners. It’s a lack of knowledge and experience in handling such a significant amount of money so suddenly.
What’s important to take stock of is your current financial direction to see how your newfound wealth will fill in the gaps. For those already financially secure and great at saving, maybe this wealth is their ability to feel safe splurging. For those who can always pay their bills but can’t find quite enough to save toward college or max out retirement, this windfall supplements the nest eggs. For others, maybe it’s a life raft toward old debts.
The following tips will help you define how your inheritance or windfall will best serve you.
Tip #1: Pause and Reflect
At the time of receiving an inheritance or windfall you will experience a mix of solid and varied emotions. You may be mourning the loss of a loved one, in disbelief at the amount of money received, and even excited at the prospect of paying down debt or achieving other big goals (like buying a house).
It’s tempting to follow your impulsive thoughts and feelings during this time, but we urge you to pause any significant financial decisions and process your emotions. Remember, any big decisions made at this time may have ongoing cash flow, tax, and estate impacts that you’ll want to consider. Typically, the greater the financial windfall, the more impactful your decision will be.
Tip #2: Assess Your Financial Landscape
If you’re anticipating a windfall, take the time to evaluate your current financial standings, including any debts (mortgage, car payment, student loans, etc.), savings accounts, and investments.
However, if you plan to use your inheritance, whether padding your retirement savings, paying off debt, or something else, you’ll want to have a realistic idea of how much the net value will be. This means taking into consideration taxes and other potential deductions.
Tip #3: Create a Financial Roadmap
A large windfall shouldn’t change the fundamentals of your financial life. You still need to set clear financial goals that align with your values and long-term aspirations (retiring, buying a vacation home, paying for a child’s college education, etc.).
With a windfall or inheritance, however, you may be able to shorten the timeline towards those goals or rethink your goals into even larger aspirations—exploring new philanthropic endeavors, investing more aggressively, or preserving wealth for the next generation, for example.
Tip #4: Seek Professional Guidance
Before making significant decisions, consider building a team of trusted professionals with experience managing large windfalls. You’ll likely want to speak with a financial advisor, estate planner, attorney, and tax professional. Having a knowledgeable team of professionals on your side is incredibly important, as they understand the legal and tax implications of a large windfall and can offer objective advice tailored to your circumstance.
Tip #5: Mitigate Tax Implications
Depending on several factors, including the size of the inheritance, where you live, and the type of assets, accounts, or investments being passed down, you may have a certain amount of tax liability to address.
The good news is the federal estate tax is levied against the estate itself, not you (the inheritor), and the exemption limit is high. In 2023, there is no federal estate tax on estates valued at less than $12.92 million per individual or $25.84 million for couples.³ Some states impose a state estate or inheritance tax, however, and that would be imposed against the inheritor of an estate.
Speak to your tax professional to determine the potential tax consequences of receiving an inheritance.
Tip #6: Embrace Philanthropy
It’s not uncommon for those who receive a sizeable inheritance to use a portion of it to support their community. Charitable giving is not only a fulfilling way to give back, but it can also provide beneficial tax advantages. Suppose you’d like to use some of your inheritance to support your philanthropic endeavors. In that case, your financial advisor can help you develop a plan that aligns with your other priorities and goals.
Being a Responsible Steward of Your Inheritance
As you prepare to receive a large windfall, remember the importance of ongoing education. Expanding your financial knowledge is vital to building a solid understanding of personal finance and investment principles. Having a trusted advisor in your corner who can serve as your financial advocate can provide great insight on how to be a steward of your wealth.
Understanding your values and priorities will help you make sounder financial decisions when the need arises. Through thoughtful planning, professional guidance, and responsible decision-making, you can work to ensure your inheritance creates long-term financial security and peace of mind.
Sources:
1The Great Wealth Transfer Will Radically Change Financial Services
2LOTTERY STATISTICS: HOW MANY PEOPLE PLAY LOTTERY IN THE U.S.?
