Inheriting Wealth: Your Roadmap To Financial Success

Inheriting Wealth: Your Roadmap To Financial Success

January 16, 2024

Inheriting wealth can be both a blessing and a daunting responsibility. While it provides financial security and opportunities, it also comes with the challenge of managing and preserving that wealth for future generations.

Whether you've recently inherited a significant sum or anticipate it in the future, understanding the steps to take after inheriting money is crucial to help ensure that you make the most of this windfall while protecting your financial well-being. In this blog post, we'll explore some key considerations for navigating wealth transfer effectively. Here’s what you need to know.

Navigating An Inheritance Windfall

The first step after inheriting money is to take a moment to breathe and come to terms with the emotions that often accompany the loss of a loved one. Grief, relief, or a mix of emotions can be overwhelming during this period. According to the Federal Reserve's Survey of Consumer Finances, slightly over 20% of U.S. households had experienced an inheritance at some point.

A financial windfall, or "sudden wealth", is an unexpected and substantial financial gain that arrives suddenly. Financial windfalls can materialize through various methods, including inheritances, lottery winnings, successful investments, or generous gifts. 

An inheritance windfall can usher in a significant and abrupt change in one's financial situation, offering newfound opportunities, financial security, and the potential to achieve long-standing financial goals. Nonetheless, effective management of a financial windfall is important. This can help ensure your newfound wealth is preserved, grown, and utilized for the recipient's benefit to enhance their financial future.

Sudden Wealth Syndrome (SWS)

"Sudden wealth syndrome" is not a recognized medical or psychological disorder, but it is a term used colloquially to describe the psychological and emotional challenges that can arise when individuals come into a large amount of money or wealth suddenly, often through events like winning the lottery, receiving a large inheritance, or experiencing a significant financial windfall.

While not an official diagnosis, sudden wealth syndrome refers to a range of emotional and behavioral issues that some people may experience when their financial circumstances change dramatically. These issues can include:

  1. Anxiety: The sudden influx of wealth can create anxiety about managing and protecting the newfound assets.

  2. Stress: Managing finances, taxes, investments, and dealing with the complexities of wealth can be stressful.

  3. Family and relationship problems: Sudden wealth can strain relationships with family and friends, as they may expect financial support or have differing views on how the money should be used.

  4. Identity and self-esteem issues: Some individuals may struggle with their self-worth or identity when their self-image is closely tied to their financial situation.

  5. Impulsive spending: A sudden increase in wealth can lead to impulsive spending and financial mismanagement.

  6. Unrealistic expectations: Expectations of perpetual wealth can lead to disappointment when financial realities set in.

  7. Lack of financial knowledge: Many people who experience sudden wealth may not have the financial knowledge or experience to manage it effectively.

Resisting the impulse to make hasty decisions regarding your inheritance is crucial. Take the time to research and carefully contemplate major financial choices thoroughly. Seek advice from a financial professional and gather all necessary information before making substantial financial decisions.

Long-term Impact of Your Inheritance

When you receive an inheritance, it's important to consider the long-term effects. Once you're in a clear state of mind, start by evaluating your current financial situation and setting your goals. It’s important to understand your inheritance clearly. For example, knowing how much you receive and what assets are included. This includes cash, real estate, stocks, bonds, or business interests. A complete picture of your financial situation is crucial before making any decisions.

Inheriting money can bring both good opportunities and potential issues. Think about how it might affect your relationships with family and others. Decide on the best way to handle the assets. This could mean selling real estate and other assets or retaining them for rental income. Throughout this process, it's essential to prioritize the needs of all beneficiaries and remain attentive to potential tax implications. This can help provide a balanced approach to your wealth management.

Understanding Tax Implications

Estate Tax is a tax on property (cash, real estate, stock, and other assets) transferred from deceased persons to their heirs. A state applies a tax rate to the value of an estate that exceeds a certain threshold. The rate and the exemption threshold differ by state. A typical state with an estate tax exempts $2 to $5 million per estate and applies rates ranging from 1 percent to 16 percent to the value of property left to any heirs except a spouse. On average, fewer than 3 percent of estates — very large ones owned by the wealthiest individuals — owe state estate taxes.

For 2024, the federal estate tax threshold is $13.61 million for individuals, which means married couples don't have to pay estate if their estate is worth $27.22 million or less. 

It's important to note that an estate tax differs from an inheritance tax. They are often referred to as the “death tax,” The inheritance tax is levied after the money has been passed on to the heirs of the recently deceased. While there is no inheritance tax in Colorado or Connecticut, some states might charge an inheritance tax if the decedent dies in the state, even if the heir lives elsewhere. 

In Colorado, there is no estate tax, but if you live in Connecticut, there is an estate tax. As of 2024, there is a flat estate tax rate of 12%. 

Seek Professional Advice

Seeking professional advice is crucial when it comes to inheritance for many reasons. Here are a few reasons why:

  • Legal considerations - it is important to consult with a financial advisor and attorney to confirm that your estate plan is legally sound and that your beneficiaries are protected. 
  • Tax implications - As seen above, it’s also greatly beneficial to understand the tax implications of these assets to help ensure that you are making the most of your inheritance.
  • Investment and asset management - Inheriting assets, such as real estate or stocks, can be a great opportunity. Still, it can also be a source of stress and conflict if not handled properly. 
  • Communication -  Proper communication with beneficiaries can help prevent misunderstandings and conflicts.

Getting a professional point of view on your inheritance situation is a wise choice. Financial professionals can help you address legal, tax, investment, and communication aspects, ultimately contributing to a smoother and more successful wealth transfer process.

Final Thoughts

It is important to carefully consider who you want to inherit your wealth and how you wish it distributed. By carefully considering who you want to inherit your wealth, you can help protect your legacy and support your family and the causes you care about. 

With Agemy Financial Strategies, you can have full confidence in discussing your new financial situation with our fiduciaries because it is our duty to never disclose customer details to a third party. Our mission is simple: we want our clients to feel confident knowing they have someone looking out for them and their estate planning needs. When you work with our team of fiduciaries, you can rest assured knowing your finances are secured for the years to come. Our advisors are here to guide you in making well-informed decisions on estate planning, retirement planning, and every other financial consideration.

To schedule a consultation and discuss your options for estate planning, contact us here today.