How to protect and manage a financial windfall.
Americans will inherit approximately $36 trillion between 2007 and 2061, according to a 2014 study by the Boston College Center on Wealth and Philanthropy.1 Women are likely to be the major benefactors of that wealth transfer.
For one thing, married women often outlive their spouses and inherit all spousal assets. An analysis by the Center on Wealth and Philanthropy found that about two-thirds of all surviving spouses are female.2 But other factors have increased the odds of women receiving a financial windfall: For example, the divorce rate among people age 50 and older doubled between 1990 and 2010, according to a 2013 study by researchers at Bowling Green State University. Many female divorcees receive a significant financial settlement they must oversee.
"Women are more and more becoming solely responsible for managing family assets and passing on a financial legacy to future generations," says Christina "Chris" Cruzpino, Senior Vice President and South Florida Area Wealth Executive for Regions Private Wealth Management. "It is important to be ready for that responsibility."
So, what steps can you take after receiving a major inheritance or other financial windfall to ensure it is managed and invested appropriately? Cruzpino provides these guidelines:
Avoid rash decisions.
Although it may be tempting to immediately invest or spend an inheritance, most experts recommend waiting six to 12 months before making any significant moves. This can prevent rash decisions and give you time to thoroughly evaluate your options. "You have to get through the emotions first," Cruzpino says. "After that, it's important to take time to analyze investment alternatives and make solid long-term decisions."
Handle administrative tasks that require prompt attention.
Although it's wise to delay major decisions when developing an inheritance strategy, you may need to take care of a few matters right away. For instance, if the inheritance includes real estate, you'll need to make sure the taxes are paid and the property maintained so it doesn't lose value. Similarly, if the inheritance includes an insurance policy, you'll want to make sure the premiums have been paid in full, so the policy doesn't expire.
Evaluate the tax implications.
Taxes can consume a substantial portion of an inheritance if they're not properly addressed. Income, gift, estate, generation-skipping and capital gains taxes often come into play with inheritances.
For example, you'll want to maximize the estate tax exemption, which is $5.43 million for 2015. Estates under this amount typically don't pay estate taxes. Moreover, the exemption is "portable" between spouses. If one spouse dies in 2015, the exemption can be transferred to the surviving spouse, boosting his or her total exemption by $5.43 million. "You can take advantage of the spousal exemption as well as the personal exemption," Cruzpino says.
Consider asset titles.
If you're married and you receive an inheritance from someone other than your spouse, you'll have to decide whether to keep the funds in your name alone or include your spouse as co-owner.
The optimal solution will depend on a range of factors, Cruzpino says. These include the ways in which you plan to use the money and how involved you'd like your spouse to be. One option is to place the assets in a trust, name your spouse as beneficiary, and make sure that the trust agreement provides that you retain ownership of the funds, but they'll go to your spouse should anything happen to you. In some cases, a trust can also protect the assets in the event of a lawsuit.
Think through your long-term financial goals.
Your goals will vary, based on your current financial situation, your risk tolerance and the goals you'd like to accomplish — whether keeping the funds for retirement, helping with your children's or grandchildren's education, or boosting your charitable giving. You may be tempted to put the money toward a major splurge, such as a vacation or upgrading your home, but be careful not to recklessly spend money you may need in the future, Cruzpino cautions.
Assemble a team of experts.
Inheriting assets is often bittersweet. Many inheritances occur only because a loved one passes away. Separating emotions prompted by the death from financial decisions that need to be made can be challenging. A team of experts can help you objectively and wisely assess your choices.
Regions can assemble a team of specialists to help with various issues after you receive an inheritance, including asset management, taxes, insurance, business planning and estate planning. "Our advisors help our clients evaluate all their options, so that clients feel good about their choices and meet their long-term goals," Cruzpino adds
"Women are more and more becoming solely responsible for managing family assets and passing on a financial legacy to future generations." — Christina Cruzpino
