By Maggie Murphy
The great wealth transfer will be one of the largest transitions of assets in history. Over the next 20 years, up to 70 trillion dollars will be distributed, and women will inherit the bulk of these funds. An inheritance can be life-changing but also fraught with emotion. With the exception of funds earmarked for retirement, most of us have never managed larger sums of money. The following suggestions can develop a wealth-preserving mindset that lasts a lifetime.
Give Back
Estate paperwork and the organization of a loved one’s household are often monumental tasks filled with emotion and exhaustion. Making a donation to a loved one’s favorite charity or sharing meaningful items with friends and family offers a lovely way to begin this long journey. After my sister passed away, I distributed her collection of dolphin jewelry to friends, family, and even a few acquaintances. This little bit of serendipity helped me begin the grieving process. (More on giving back in this article.)
Supercharge your Monthly Budget
Even a modest inheritance can revitalize or supercharge your monthly budget. First, eliminating high-interest debt will create additional space in your monthly budget. This is also the perfect time to begin paying yourself first for upcoming purchases. For example, if you no longer have a car payment, place those funds in a savings account each month for your next car purchase. While we occasionally need small car loans, the debt is paid within a year, and we’re soon rebuilding for the next time. This is also an excellent time to increase contributions to employer-sponsored retirement plans.
Start or Strengthen your Emergency Fund
An inheritance can be used to boost or open an emergency fund. According to a Federal Reserve economic survey, approximately 4 out of 10 families cannot fund an unplanned $400 expense. An emergency fund helps protect your wealth by funding those unexpected costs, such as costly home and car repairs or temporary unemployment. In addition, contributing to this account as part of your regular monthly budget helps build the recommended 3-6 months of living expenses.
Empower the Next Generation
An inheritance also presents teachable moments to pass financial wisdom to the next generation. Introducing your children to a financial advisor can spark valuable discussions like the importance of planning where your money goes and the wonder of compound interest. When our children were in elementary school, we gifted them a small amount to open an investment account and issued a challenge: Add $100 to this new account, and we would match their contribution. We had our proud Mom and Dad moment when the kids looked for summer jobs, mowing lawns, helping with yard work, etc. This began a lifelong connection with a financial advisor, a nudge to save money, and an investment account to take into adulthood.
Speak with a Financial Advisor
Working with a financial advisor can also help minimize the tax burden from pre-tax inherited accounts. According to Kiplinger’s Personal Finance, those inheriting a non-spousal traditional IRA must choose from the following options: “Take a lump sum and pay taxes on the entire amount, or transfer the money to an inherited IRA that must be depleted within ten years after the death of the original owner.” This is also the ideal time to develop the habit of meeting with a financial advisor at least once yearly. We meet with our physician once each year to discuss our physical health. What about regular meetings to maintain our financial health?
Plan a Special Purchase
One small step that helps adjust to inherited wealth is to plan a special purchase. You could enjoy a fancy meal or attend a memorable concert with family. What about starting a savings account for a bucket list trip? You might enjoy learning about a unique destination while saving for your next adventure. Studies show that the anticipation of a trip and planning a basic itinerary reduce stress and create a more enjoyable experience. A bit of delayed gratification also strengthens your financial resolve.
Finally, have you set any long-term financial goals? A study from Ohio State University revealed that up to 1/3 of heirs spend all their money within two years. However, those who develop a plan (and enjoy a few special purchases) are more likely to make informed financial decisions and preserve an inheritance for a lifetime or future generations.
ABOUT THE AUTHOR
Maggie Murphy is a lifelong Michigander and graduated from Hillsdale College. She works as an educator and writer who also enjoys performing Irish, Scottish, and Americana folk music, attending book clubs, and running a small farm with her husband.
