About To Inherit A Big Sum? Here Are Some Steps to Prepare

Inheriting money can be a highly emotional and mind-boggling process. It can involve dealing with the loss of a loved one while discussing often-sensitive financial topics with family members.

If you are set to receive a large estate, understanding what that looks like – whether it’s in the form of cash or assets such as investment accounts, real estate, or a life insurance policy – is essential.

Each asset type has its own tax implications and regulations. Some assets, such as cash, will be exempt from federal taxation when inherited, while others, such as the securities within certain retirement accounts or annuities, will be taxed when sold. It’s also crucial to know how the funds will pass to you and what rights you will have over those assets.

To navigate these complexities, it helps to gather up a team of experts such as lawyers, accountants and, perhaps most crucial, a financial advisor.  Financial advisors provide financial services and advice to clients based on their unique personal and financial situations. They can help you prioritize your financial goals, develop a plan to achieve them and help you adjust your goals along the way.

Enter Datalign

Datalign can help you find a financial advisor tailored to your specific personal and financial needs.

Datalign’s free, proprietary search engine matches consumers with a suitable financial advisor among thousands in Datalign’s carefully vetted network of advisory firms. These financial advisors can help manage inheritances, retirement savings and investments, as well as develop strategies to pay down debt or establish legacies.

Whether you’re looking for a review of your financial outlook, need help creating a retirement plan, or are looking for a dedicated team to manage and grow your existing investment portfolio, Datalign can help you find the right financial advisor for your needs.

To do this, consumers fill out a quick, three-step web-based questionnaire that’s free of charge, taking just a few minutes to match the consumer to a suitable advisor. As part of the process, Datalign shares your information with your singularly matched advisor.

The first step in the questionnaire presents consumers with a wide variety of questions that range from topics such as profession and income, to retirement plans and investment objectives. Questions may include, “When do you plan to retire?” or “How do you currently manage your portfolio?” The online questionnaire gathers this data to help match you with an advisor tailored to your personal and financial situation.

Then, in the second step, Datalign uses its proprietary algorithm and the data you entered in the questionnaire to recommend a financial advisor who is uniquely qualified for your needs.

The last step provides you with an opportunity to set up a call with your recommended and matched financial advisor or advisors. You are under no obligation to speak with your matched financial advisor.

Why Use a Financial Advisor?

From helping you avoid financial risk to working with you to build wealth over the long run, choosing the right financial advisor is an important life decision that could play a part in determining your financial future.

The “Great Wealth Transfer,” as the greatest intergenerational wealth transfer stemming from aging Baby Boomers is called, is making inheritance management increasingly crucial. According to financial market intelligence firm Cerulli and Associates, over $70 trillion could be passed on to younger generations over the next 20 years.

Andrew Johnson, board advisor to Datalign Advisory, puts it this way:

“Selecting a financial advisor is a big decision; not exactly one that should be sourced on Yelp. With over 50,000 Investment Advisory Representatives (IARs) in the country, it’s a daunting task. It isn’t just about finding a reputable advisor who knows the industry, it’s about finding someone whose expertise specifically complements a client’s. We make this process easier and more efficient for clients and advisors alike.”

To illustrate the importance of using an advisor, Datalign cited a recent survey that found 62% of adults admit their financial planning needs improvement. Meanwhile, the same study suggested 66% of those interviewed noted they feel more financially secure when using an advisor, versus 30% for those who don’t.

Furthermore, hiring a financial advisor can add an average of 3% annually to net investment returns, according to a Vanguard analysis.

This performance improvement translates to greater peace of mind, according to the same Vanguard analysis. Investors with a financial advisor report being more than twice as likely as those without one to be “very confident” in their investment strategies.

Uncertain Times

A worsening global economic outlook also presents unique challenges that make financial advisors increasingly relevant, according to Datalign.

Recent World Bank research states that global economic growth decelerated from 5.5 percent in 2021 to an anticipated 2.7 percent in 2024.

“We believe that it’s more important now than ever to review your financial situation with an expert who can ensure your investment strategy is best equipped for economic uncertainty,” Datalign says.

Consider These Additional Steps

In addition to hiring a financial advisor, you should carefully consider the following steps to ensure your inheritance stands the test of time:

1. Take a breather

Take a step back to consider what you have inherited. Depending on what you received, it’s a good idea to evaluate your inheritance to avoid costly mistakes. Make sure you talk to your financial advisor about estate taxes and other implications that come with inheriting a large sum of money.

An inheritance can come in many forms, such as cash, stocks, bonds, retirement plan accounts, business interests and real estate. Your financial advisor will help assess these elements, calculate their potential returns, and may determine the best path forward to help keep your investments aligned with your tolerance for investment risk.

Not sure what you have inherited? You may be able to find out by visiting www.unclaimed.org, the web site of the National Association of Unclaimed Property Administrators (NAUPA), or www.Missingmoney.com, but move quickly. Unclaimed assets – which can include bank accounts, bonds, certificates of deposit, dividend or payroll checks, retirement accounts and even items left in safe deposit boxes – are considered abandoned or dormant if they have not been active for a period of time, usually for over a year.

2. Count in Uncle Sam

While inheritances generally aren’t considered taxable income by the federal government, the IRS does tax certain earnings made from the inheritance and assets when cashed out.

Your financial advisor will work with you to identify specific tax liabilities such as those linked to individual retirement accounts, retirement funds, investment portfolios or life insurance to understand how to reduce potential tax consequences.

If you are a beneficiary of a retirement account, there may be IRS rules around any required minimum distributions you’ll need to take, so hiring a professional to advise on this is helpful. Conversely, money coming from a life insurance policy is generally not taxed, but you’ll still want to double-check with a financial advisor.

“Each asset you get comes with different implications,” says Rick Simonetti, founding partner and CEO of wealth planning at Fidelis Capital. “IRAs come with the responsibility of paying income taxes when you cash them out, while life insurance policies don’t.”

3. Assess your financial goals

Do you want to use your inheritance to invest in a new house, pay off debt or build a nest egg?

This may be a good time to re-examine your financial needs and goals as an inheritance can be a game-changer. Creating a budget outlining your future income and expenses can help you decipher how much your newfound wealth will buy and last. Once you have done this, you can figure out if purchasing a new home is appropriate or if you should pay off debts or establish an emergency fund instead.

4. Create an estate plan or legacy

You may also want to create or update your estate plan. An estate plan will analyze the sum total of your assets and possessions of value (for example, your car, home, financial accounts, investments and personal property).

Estate planning is the process of deciding which people or organizations will receive your possessions once you’ve passed on.

As you start the estate planning process, a knowledgeable financial advisor can help you create a comprehensive plan that ensures the distribution of your estate assets to selected beneficiaries. A financial advisor can also help ensure your intentions are carried out. By working with an estate planning lawyer, they can create a trust for the funds so your assets are used only for the intended purposes.

5. Communicate with your family

If a loved one is expected to pass, it helps to talk with them and other family members or expected heirs about what will be bequeathed.

This can help the family figure out what to do with the estate moving forward, while ensuring their descendants can best use it in the future. Preparing heirs for a wealth transfer can help provide a shared vision for how the funds will be distributed over time and even generations. It can also avoid family feuds, and may even help reduce estate taxes.

“The time to ask questions is not after you receive the inheritance,” notes Simonetti. “It’s important to have a conversation about what is in place and why so that there aren’t any surprises.”

Sudden wealth can be a risk to heirs who aren’t prepared to receive it,  Simonetti adds.

“A person who pays $1,000 a month in rent and suddenly inherits $2 million may not be ready for such sudden wealth if they have not prepared or budgeted for it,” Simonetti explains. “If the heir doesn’t know what questions to ask, who to rely on or who to sound themselves with, they could spend it all in a few years and go broke. This is one of the reasons why wealth fails to make it through multiple generations.”

In conclusion, inheriting money is a key life event that must be carefully and thoughtfully managed. You don’t need to go it alone. Financial advisors can help you navigate the process with greater confidence.