Making Smart Decisions about Your Inheritance

You may have heard the humorous proverb: “The rich are different from us—they have more money.” Interestingly, many people who most of us might think of as rich tend to not think of themselves that way. According to a 2019 survey by Ameriprise Financial, only about 13% of those with net worth of $1 million or more think of themselves as “rich.” And a 2024 survey by Charles Schwab found that Americans believe you need at least $2.5 million to be considered wealthy.

Nevertheless, as financial advisors working closely with family stewards, we often find ourselves assisting young individuals who have unexpectedly inherited substantial assets. It’s a significant responsibility to guide these heirs through the process of receiving and strategically positioning their newfound wealth. For many of them, it’s their first encounter with managing substantial sums, which can be quite overwhelming. However, understanding some fundamental facts and following specific steps can simplify the process, potentially saving on expenses and taxes tied to the inherited wealth.

And making good decisions about “sudden wealth” really matters: as we’ve written previously,  fully a third of Americans who receive a significant inheritance are likely to spend it all—and then some—within two years of receiving the money. Whether you are fortunate enough to have had foreknowledge and preparation for receiving your inheritance or whether it arrives suddenly and with little warning, here are three steps you can take to ensure that you’re ready to responsibly manage your windfall.

1. Get good help. The first step in making smart decisions about managing an inheritance is having the right advisors. At a certain level of wealth, considerations around taxation, investment, estate planning, liability, and other matters become too complex and technical for the average person to address adequately—especially those with a mostly non-financial background. So, one of the first things to do if you want to increase the odds of hanging on to more of your wealth is to get the right people on your team. The first step is to work with a financial advisor who can “quarterback” your strategy along with the other specialists on your team. Your advisor can help you accurately assess your current financial situation and the best strategies for employing your newfound wealth. They can also help you determine your risk tolerance and how your newly acquired funds should be invested. This will help you determine whether growth, income, gains, or tax issues are to be considered and in what dimension relative to the investment of the assets.

Next, you should consider retaining the services of a qualified certified public accountant. Since taxes are always a concern for both income tax purposes and estate tax purposes, the right CPA is one of your most valuable assets. In fact, one of the major factors separating those who retain and grow their wealth from those who don’t is the systematic consideration of the tax consequences of various financial decisions. You will also want to obtain good counsel from an attorney who has expertise in estate planning, preferably one who has experience working with large estates. In addition to completing standard documents such as a health proxy, power of attorney and will, and possibly a trust, the attorney will also review the receipt of the funds and work with the other professionals to protect your assets from future taxes or creditors’ claims. Finally, you will want to utilize the services of an insurance professional. All liability coverage for cars, homes, boats, etc., should be reviewed to increase the limits of liability. Liability coverage is not usually a significant expense, but still should be a priority. An umbrella policy that provides excess coverage in the event of insufficient liability coverage on other policies should also be considered. This is also a good time to review life insurance and potential long-term care insurance issues. For the newly wealthy, it’s important to determine what your needs will be if you pass away suddenly or become disabled—you don’t want to have a large portion of your inherited wealth spent on estate taxes or long-term care expenses without a plan to replenish those assets.

2. Study the documents. To effectively manage an inheritance, it is vital to become intimately familiar with the relevant documents. Think of this as “Estate Planning 101”: the will, or in some cases, trust documents, serve as the diagram for how the assets will be distributed. If there’s no will or estate planning document in place, the situation can quickly become a labyrinth of legal complications, leading to substantially higher costs for settling the estate and finalizing asset distribution. While seeking the counsel of an experienced estate planning attorney is advisable, especially for substantial bequests, it’s equally crucial to grasp the fundamental outlines of the will or trust. You don’t need to become an estate planning attorney yourself, but you need to know enough to make informed decisions. Having a good basic knowledge of these matters can also significantly reduce your stress level.

3. Know your cost basis. Let’s say that an older relative passes away, and their will stipulates that you will receive stock they owned. Let’s also say that they bought the stock years ago at a price of $20 per share. Today, however, that stock is worth $150 per share. Current estate law in most states provides what is called a “stepped-up basis” for your cost; your ownership is set at the price of the stock when you inherited it: $150 per share. The same would be true of any real estate or other tangible asset that you inherit. This is important because the assets you inherit may not necessarily be appropriate for you to continue owning long-term. For example, suppose you have inherited a commercial property that is located in another state. Unless you want to be in the interstate property management business, you may wish to sell the property and reallocate the proceeds into a different type of investment. Since your cost basis upon inheriting the property is set at its value upon the death of the testator (the person who made the will), you could possibly sell the property without incurring much, if any, capital gains tax.

And by the way, this is where your CPA, financial advisor, and attorney can really help. Tax laws—including those governing the taxation of capital gains on sales of appreciated assets—can and do change. In fact, in this election season, various changes in tax laws are being discussed. Your advisors can help you stay abreast of these potential changes and incorporate strategies into your plan to help you avoid paying taxes unnecessarily.

At Aspen Wealth Management, we know how intimidating it can be to find yourself in the position of taking responsibility for “sudden wealth.” Our fiduciary commitment to our clients means that we provide guidance and advice that places the client’s best interest ahead of everything else. To learn more, visit our website to read our article, “My Ship Came In: What Do I Do Now?”