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Making Smart Decisions about Your Inheritance

The fact is that however you encounter prosperity, the decisions you make about what to do “when your ship comes in” will largely determine how enduring your new wealth will be.

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What issues should i consider before i retire?

In times past, you might sometimes hear a person daydream about what they’d do “when my ship comes in.” The reference comes from the days when a group of investors would fund the voyage of a merchant vessel, then divide up the profits when the vessel returned, loaded with valuable cargo. Because sea voyages were quite uncertain and ship-to-shore communication was unreliable or nonexistent, “when my ship comes in” came to refer to a hoped-for—but not guaranteed—time of good fortune and prosperity. Nowadays, it might be more common to hear someone talk about what they will do “when I win the lottery.”

The fact is that however you encounter prosperity, the decisions you make about what to do “when your ship comes in” will largely determine how enduring your new wealth will be. It’s sobering to realize that a 2015 study at the Ohio State University found that fully a third of Americans who receive a significant inheritance will spend it all—and then some—within two years of the bequest. Whether you are fortunate enough to have had foreknowledge and preparation for receiving your inheritance, or whether it arrives suddenly and with little warning, there are steps you should take to ensure that when your ship arrives in port, you have a plan to ensure the longevity of your good fortune.

1. Build your team.

Most persons with significant wealth realize that they can’t make all the required decisions without help. At a certain level of wealth, considerations around taxation, investment, estate planning, liability, and other matters become too complex and technical for the average person to address adequately—especially those with a mostly non-financial background. So, one of the first things to do if you want to increase the odds of hanging on to more of your wealth is to get the right people on your team. It’s highly advisable to obtain the services of a qualified, professional, fiduciary financial advisor who can become the “quarterback” of your wealth management team: guiding and advising you on matters like investment strategy, budgeting, saving vs. spending, tax-efficiency, and other important financial management issues. In many cases, your financial advisor should also be able to recommend the services of a qualified attorney to help with estate planning considerations as well as a CPA, who can help you enact tax-smart strategies that allow you to keep more of what you own, rather than sending it to the state or federal tax collectors.

2. Learn the ropes.

In the case of a bequest—when you are the beneficiary of a trust or a deceased person’s will—you should become familiar with the documents (this is where an estate planning attorney can be of greatest assistance). The will—or, in some cases, the trust documents—govern how the assets will be distributed. When there is no will or other estate planning document in place, things get much more complicated, and the legal costs for settling the estate and making final disposition of the assets rise dramatically. Even if you do hire an attorney, there is no substitute for becoming as familiar as you can with the general terms and broad outlines. Having this knowledge going in will enable you to participate more confidently in decisions surrounding the handling of the bequest.

3. Know your cost basis.

Let’s say that an older relative passes away, and their will stipulates that you will receive stock they owned. Let’s also say that they bought the stock years ago, at a price of $20 per share. Today, however, that stock is worth $150 per share. Current estate law in most states provides what is called a “stepped-up basis” for your cost; your ownership is set at the price of the stock when you inherited it: $150 per share. The same would be true of any real estate or other tangible asset that you inherit. This is important, because the assets you inherit may not necessarily be appropriate for you to continue owning, long-term. For example, suppose you have inherited a commercial property that is located in another state. Unless you want to be in the interstate property management business, you may wish to sell the property and reallocate the proceeds into a different type of investment. Since your cost basis upon inheriting the property is set at its value upon the death of the testator (the person who made the will), you could possibly sell the property without incurring much, if any capital gains tax.

4. Retirement accounts.

Because retirement accounts—IRAs, 401(k)s, 403(b)s, and other, similar accounts– can be bequeathed by means of naming a beneficiary, much like an insurance policy, they are often passed to children or grandchildren upon the death of the owners. Often, it’s a good decision to roll such proceeds into a rollover IRA account. This can allow you to maintain the tax-advantaged nature of the assets for a longer period of time. However, unless you are the spouse of the owner, you will probably need to take distributions from the account over a maximum period of ten years. This allows you to spread the tax liability over ten years, but you will want to consult with your CPA and financial advisor about ways to minimize the tax burden with respect to your other income.

5. What about life insurance?

It is very common for children and grandchildren of deceased persons to receive life insurance proceeds in the form of a death benefit. While the proceeds themselves are not typically considered taxable income, the earnings and growth you are able to obtain from them are. Your financial advisor can work with you to determine appropriate ways to invest these funds tax-efficiently.

At Milestone Money, we know the importance of being good stewards of what has been received. As a fiduciary wealth advisor and financial planner, we work with our clients to develop sound financial strategies, based on their unique situations, goals, needs, and priorities. To learn more about the important milestones you will pass on your way to your important financial goals, please visit our website.

What issues should i consider before i retire?

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Life is full of financial milestones. We pay for college, we get married, we start businesses. But the most important financial decision we will ever make is when and how to retire. Milestone Money helps you map success to and through retirement.

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