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Newsletter: 5 Steps to Managing an Inheritance for High-Net-Worth Individuals

It’s starting to feel like summer is winding down.  We are so fortunate to be able to enjoy the beautiful summers we have here in Traverse City. Long days spent outdoors, packed with activity.

The slower pace of August has been nice, though. Over the last few weeks, we have savored our time outdoors - boating on Glen Lake with family and friends, hiking, and mountain biking on various local scenic trails.  

Every year, our family looks forward to the Tour De Tart, an annual bike ride from Traverse City to Suttons Bay, which was canceled this year. The cancellation didn’t deter us; we decided to make the bike trip anyway!  It started at a leisurely pace, and then somehow, it became a bit more competitive.  I’ll skip the details about who placed in what position.  Rest assured, no one was injured except my pride!

I hope you appreciate everything early fall brings and that you enjoy our monthly newsletter.

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5 Steps to Managing an Inheritance for High-Net-Worth Individuals

Receiving an inheritance brings with it a wide range of emotions - grief for the loved one you lost and eagerness or excitement for the bequest you’re about to receive. 

As you tackle the responsibility of managing a large inheritance, it’s important to remember that it can too easily be squandered away. In fact, up to 70% of people who receive an inheritance or other large sums of money (such as a lottery win) will lose it within a few years. Fortunately, as a high-net-worth individual, you and your family may already have a solid sense of responsible saving and spending. When the time comes to manage an inheritance, there are five steps you may want to consider taking to make the most out of your loved one’s final gift.

Step 1: Coordinate with Your Trusted Team

Before making any sudden decisions, you should assemble a team of financial professionals you can trust to have your best interest at heart. If you do not yet work with financial professionals, take your time finding those who are familiar with your situation or who have worked with others in a similar situation. When a large sum is inherited, it’s a good idea to coordinate with these professionals:

  • Financial planner: With this important change in financial status, you’ll want to speak with your financial planner regarding the effects this inheritance can have on your total financial picture. Firms such as ours can assist you further by proactively finding solutions and coordinating efforts with your CPA, attorney, and insurance agent.
  • CPA: You'll want to work with your CPA to understand the possible tax implications this new inheritance could have on the upcoming tax season.
  • Attorney: You may already be well aware of the liability and life insurance measures that should be taken, but it won’t hurt to work with your attorney to make sure you, your family, and your money are protected.
  • Insurance agent: Beyond a lump sum, some high-net-worth inheritances could include art collections, classic cars, jewelry, and more. To keep your new collections protected, you may want to meet with your insurance agent to discuss these inherited valuables.

Step 2: Understand Your Tax Obligations

According to the IRS, as of 2019, individuals can leave up to $11.4 million to their heirs without paying any federal estate tax. But if your loved one is leaving you more than $11.4 million, the estate could be hit with a 40% federal tax bill. The good news is that there is no inheritance tax at the federal level. However, six states currently employ a state inheritance tax: Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey, and Maryland.

Receiving an inheritance from a high-net-worth individual means you could be receiving physical gifts such as vacation properties, family homes, cars, antiques, jewelry, art, and more. Should you decide to sell any of these valuables later, you will be responsible for a capital gain tax. A capital gains tax applies to the difference in value (only if it is an increase) of the item from the day you received it and how much it sold for. As an example, if you received a vacation property that was valued at $500,000 and sold it three years later for $750,000, you would be taxed on the long-term capital gains of $250,000.

To avoid any tax pitfalls, you may want to promptly discuss the various tax implications receiving an inheritance could have in the future with your financial planner or CPA.

Step 3: Keep Quiet About Specifics

When receiving a large sum of money, you could easily be tempted to post about it on social media, tell your friends and neighbors, or discuss it with extended family. But resisting the urge to talk about your inheritance could be beneficial for several reasons. 

Making it well known that you’ve recently received a large sum of money could make you especially susceptible to unwanted business or investment pitches, or it could set an expectation that you’re willing and able to pay for friends and family in social settings (going out to eat, vacationing, etc.).

Additionally, and especially in the case of high-net-worth families, wealth may not be distributed evenly among the deceased’s children and grandchildren. For this reason, you may not want to be too specific with your brothers, sisters, aunts, or uncles regarding how much inheritance you received.

Step 4: Avoid Making Sudden Decisions

You may be accustomed to living a financially comfortable lifestyle, but almost no one is immune to the emotional excitement of receiving a large lump sum of money. Before you head to the car dealership or book an exotic vacation, stop and take some time to digest your new financial standing and think about your options. In the heat of the moment, you can be more prone to making rash or unwise financial decisions instead of weighing your debt repayment or investment options.

Whether you get a one-time payout or payment over multiple years, you may feel a sense of sudden financial independence that entices you to quit your job or retire early. This is why working with a team of level-headed, unbiased professionals can help you make financially sound decisions that are not emotionally charged.

Step 5: Pay Off Debt Strategically

Maybe your first instinct isn’t to purchase a fancy car or buy a beach house; it may be to pay off all of your debt - mortgages, car payments, student loans, credit cards, etc. This could be a good choice to make, but you want to be strategic about what debt you decide to pay off and what you end up keeping. For example, it may be beneficial to pay off high-interest debt, such as student loans and credit cards. But for loans with lower interest rates, such as mortgages or auto loans, you may actually be better off using that money to invest instead. In some cases, the interest made on certain investments can be greater than the interest you’re paying on certain loans. Seeing as everyone’s unique financial standings are different, these options are best discussed with your trusted financial professional.

Making your inheritance last takes proper management, discipline, and teamwork. As you move through the five steps above, remember to take your time and ask your team of trusted professionals any questions you may have. 

You may have spent decades accumulating a high-net-worth, but when it comes to handling a large influx of wealth, you may not have all of the answers. That’s why it’s important to take your time now to preserve your inheritance for years to come.

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