The Heart-Centered Guide to Managing an InheritanceJuly 18, 2022
After managing the challenges of a loved one’s passing, many heirs are often too emotionally exhausted to touch their inheritances. This is absolutely understandable, and it’s essential to find moments of rest in difficult times. But what if we begin to think of inheritance as an opportunity to connect with the present, rather than a symbol of what has passed? By taking hold of our inheritances, we can bridge the gap by carrying over our loved ones’ financial legacies into our present lives.
Reconnect with yourself and your loved ones with this guide to managing your inheritance.
In this guide, you will learn:
- Why it’s essential to manage your inheritance now
- How to foster financial independence after receiving an inheritance
- 4 ways to pass on your wealth and values to the next generation
Why it’s essential to manage your inheritance now
When we inherit cash and sit on it, the value of this cash begins to quickly erode due to inflation. Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in the economy.
Imagine that your cash is a pile of sand, and inflation is the wind. As the wind blows, it picks up sand, steadily reducing the pile. The wind may pick up or slow down, but it’s always blowing away the sand. Over time, the sand pile appears much smaller than the surrounding sand dunes. This is how cash, like uninvested inheritances, erodes in value.
As of May 2022, the inflation rate reached a 40-year high of 8.6%. This means that if you had a pile of cash sitting in the bank between May 2021 and May 2022, that money lost about 8.6% of its value. Even when earning interest, cash sitting in the bank just can’t keep up with inflation.
This may be a missed opportunity, but fear not – it is truly better to invest late than never invest at all. Now is your moment.
How to foster financial independence after receiving an inheritance
Many people aim to become financially independent, meaning they no longer have to work to support their lifestyles. Passive income and savings provide the support necessary to live a comfortable life.
While an inheritance can appear like an instant path to financial independence, even large sums require an intentional approach to retain their value. Wherever you are on your path to financial independence, it’s important to calibrate your financial plan.
Be aware. We all have tendencies when it comes to money. It’s better to face these patterns and ask, “Is my approach to money helping me live the life that I want?” Some people love to spend and have trouble saving for the future. Others want to save but aren’t comfortable with market risks. There are many emotions that come up when managing our money, especially inheritances. The first step is to understand your unique relationship with money.
Be intentional. To shift our patterns, we want to reflect on our values and goals. Do you envision starting a business? A restful retirement? A peaceful transfer of your estate to your loved ones? We can develop a healthy, motivated approach to managing our money by asking, “What do I want, and how can money help me accomplish this?”
(Re)allocate. Once you have a sense of your behaviors and goals, you can create a plan that aligns with who you are. If you receive an elderly relative’s portfolio, be sure to reassess the portfolio’s asset allocations (the mix of investments in the portfolio). Neglecting to update the portfolio based on age, risk tolerance, and time horizon is likely to leave money on the table. Take charge of your financial future by assessing your portfolio’s allocation – and don’t be afraid to ask for support!
4 ways to pass on your wealth and values to the next generation
To ensure that our wealth supports our loved ones, we need to plan for the peaceful transfer of wealth. If you’ve received an inheritance, consider how the process went for you. Was there a clear will? Did you have to go through a lengthy probate process? Reflecting on your own experience can help you think about what you do and don’t want for your inheritors.
Here are several key strategies to help ease the process of passing on your wealth:
- Draw up a clear will. A will is a legal document that describes how you want to distribute your property and how to care for your children. A will lessens the burden of a loved one’s passing by clearly laying out your plans. A will also offers an opportunity to connect with family and pass on valuable life lessons.
- Set up a trust. Trusts are legal arrangements that assign who will distribute your assets and who will receive those assets during your lifetime and after death. While most wills lead to probate, a trust skips probate by clearly assigning a “trustee” who is responsible for holding and managing the distribution of assets. Trusts and wills have key differences, so familiarize yourself with them and work with a financial professional to find the right fit for you.
- Convert traditional IRAs to Roth IRAs. If your goals include maximizing the value of your wealth and reducing the burden of inheritance on your loved ones, consider this conversion. Heirs of traditional IRAs are now required to withdraw all money from their account within 10 years, which may result in a higher tax rate if the inheritance is large. If the sum is converted to a Roth, the converted amount becomes subject to annual income taxes, but withdrawals are tax-free – a trade-off worth considering.
- Gift your money. A careful gifting strategy can also help maximize the value of your assets and support your family. You can give away money to your family while you’re still alive, but it’s important to be mindful of gift taxes. Charitable donation strategies, such as setting up donor-advised funds, can reduce the tax burden on your assets while consistently contributing to impactful causes.
Ultimately, the best approach is a tailored approach – one that aligns with you and your specific wishes for your loved ones.
Inheritance is an opportunity to connect.
At SWM, we see estate planning as a chance for individuals to share their stories and values with their families. Whether you’re just starting the process or you have a robust plan, we’re here to support you and your loved ones with honest and empathetic guidance.