According to a report in the Wall Street Journal, $70 trillion worth of assets will be transferred from older to younger generations over the next two decades. The good news is, a fraction of these assets could be yours. However, just like earned wealth, inherited assets will need proper management.
In this blog, we will discuss some tips and wealth preservation strategies for managing inherited wealth. But first, let’s see what inherited wealth means.
Inherited wealth is assets or properties passed down from an older to a younger generation to provide financial opportunities and security. The wealth often includes financial assets like stocks, bonds, and real estate or non-financial assets like family businesses, heirlooms, and other personal property.
Now, there is no denying that managing this inherited wealth can be challenging, especially with the complexities of wealth management, estate planning, tax laws, and trust administration. Thankfully, with the aid of an expert financial planner in Portland, you can ensure wealth planning for future generations, preservation of your family legacy, and positive contribution to the greater good of society.
Let’s now see the sure strategies to employ in wealth transfer planning and management of windfalls.
Estate Planning and Taxation
Estate planning is the process of transferring assets from one generation to the next by wills, trusts, and other legal documents; and inheritance tax is a tax placed on the transfer of assets to a beneficiary. Though they vary by jurisdiction, the tax is often based on the value of the assets and the relationship to the beneficiary.
Since the inheritance tax can often be a significant expense, proper estate planning and inheritance tax planning are vital to minimize the impact of taxes and other expenses.
Consider seeking the services of reliable wealth planning advisors to develop a comprehensive estate plan that aligns with your goals and values while minimizing tax liabilities. The plan could include strategies like establishing trusts and making lifetime contributions to reduce the estate’s value or maximize tax-free exemptions.
Wealth Management
There are financial and legal requirements when managing an inheritance, especially for high-net-worth individuals. So, before you get overwhelmed, employ the services of wealth management firms to assess any outstanding liabilities and recommend investment possibilities.
Be intentional with creating long-term investment plans like maxing out your 401(k)s and IRAs with the inherited funds. After all, if managed properly, this wealth enhancement technique guarantees a return on investment and a financially secure retirement.
Also, remember the most common retirement mistake to avoid – putting all your eggs in one basket. Consider employing wealth diversification tactics to share your portfolio among various investments with different risk levels, as this will help mitigate the risk of loss from economic factors. Put your “eggs” in many “baskets” like stocks, bonds, real estate, and other asset classes to balance risk and returns and provide stable, long-term investments.
Investing is not a “one-fix” financial decision. Continue monitoring and evaluating your investment’s performance, identifying potential risks or opportunities, and making tweaks to ensure the portfolio remains aligned with investment goals.
Asset Protection
Even if your inheritances are in the form of real estate, art, antiques, jewelry or cars, etc., you will still have to ensure effective wealth management for your family.
Unfortunately, the taxes for some individual assets are complicated. For instance, if you inherit securities or traditional IRAs, you will be subject to taxes when you sell securities or withdraw from the account. For Roth IRAs, while you may be tax-free, you must close or empty the account within five years.
To protect that windfall, consider limiting access by employing a wealth preservation tool, like setting up a trust. In addition, select an appropriate insurance coverage to protect against various risks, including property damage, liability claims, or loss of income due to disability or death. Review your insurance policies regularly and ensure they remain aligned with your goals.
Family Legacy and Philanthropy
An inheritance is a result of years of hard work passed down from older generations. So, ensure your financial decisions are directed towards preserving your family’s legacy and memory. You can start by developing a wealth transfer and gifting plan for managing family assets.
Identify causes or organizations that align with the family’s values and interests, like supporting education, healthcare, or environmental conservations. Recognize your family’s philanthropic goals and strategies, either establishing a family foundation or engaging in strategic giving.
You can then create a charitable trust that allows for the distribution of assets to charitable causes while also providing tax benefits. Use any wealth allocation strategies, including charitable remainder trusts (CRTs), private foundations, grantor charitable lead funds, or Donor Advised Funds (DAF).
DAFs are the easiest, most cost-effective, and most convenient wealth protection tactics to avoid capital gains and get an upfront deduction.
Trusts and Estates
Trusts and estates are legal tools created to manage and distribute inherited wealth according to the wishes of the one who created the trust or estate. The primary goal of this wealth distribution planning is to protect assets from creditors, minimize taxes, and sustain beneficiaries.
You can choose the ideal trust after critical wealth distribution considerations, including your goals, financial situation, and family or company dynamics. Consult your estate planning advisor to determine the trust for your company’s unique situation, whether revocable, irrevocable, charitable, or any other.
After choosing your trust, draft a detailed trust document outlining the terms of the trust and instructions for the trustee. Then fund the trust by transferring assets such as real estate, stocks, or bonds. Constantly review and tweak the trust regularly to ensure it aligns with your changing goals for efficient wealth succession planning for business owners.
Conclusion
Effective inherited wealth management offers tax planning, estate planning, and asset protection strategies. Plus, with proactive planning in this direction, you can minimize taxes and expenses, foster family harmony, and create a long-term impact through philanthropy.
You may only receive one inheritance in a lifetime. Manage it rightly! You can apply any of the strategies discussed or the 90/10 portfolio approach. But remember, you don’t want to DIY this wealth management opportunity. Get a professional team of financial advisors to help you navigate the mixed emotions and recommend opportunities that align with your wealth management and financial literacy goals.
Disclaimer: This content does not necessarily represent the views of IWB.