Have you heard of the Great Wealth Transfer? It refers to the wealth expected to pass from the Silent Generation to their Baby Boomer children and from Boomers to their Millennial and Gen Z kids in the coming decades. By one estimate, the two older generations will pass down about $84 trillion between now and 2045. Almost $73 trillion of that is expected to go to their heirs with the rest given to charity.
Despite the boost to net worth that this wealth transfer should be for anyone set to inherit, a recent New York Life Wealth Watch survey found that only 42% of people “feel very comfortable financially handling” their expected inheritance. If you’re like the other 58% who aren’t so confident, this guide will help you make the most of any inheritance you receive in the coming years.
1. Put it in a safe place to start.
Whether receiving money as a life insurance beneficiary or from a loved one’s estate as their heir, protect the funds from theft by depositing them into a checking or savings account. Choose a bank that is federally insured by the Federal Deposit Insurance Corporation (FDIC) or a credit union that is likewise insured by the National Credit Union Insurance Fund (NCUSIF) to keep your money safe in the rare case of institutional failure.
Both programs offer protection of at least $250,000 in total savings (checking, savings and CD or term account balances combined) per person, and offer many other options that include coverage for accounts larger than $250k.
With your inheritance safely deposited, you can be deliberate in deciding how best to use the funds to improve your overall financial situation.
2. Establish or bolster your emergency fund.
Do you have three to six months’ worth of expenses set aside for an unexpected financial emergency like a job layoff? If not, your loved one’s parting gift offers you an easy way to establish or add to an emergency fund—an essential for financial stability.
Opting for a distinct savings account for your emergency fund will keep it from getting mixed up with savings for other financial goals or from the temptation to use it for non-essential purposes. Plus, a high-yield savings account maximizes the interest you can earn on this money.
3. Pay down your high-interest debt.
Also consider tackling any high-interest debt you’re carrying, especially large outstanding balances on credit cards. Unlike good debt, such as a mortgage, which helps you build wealth, credit card debt keeps you from achieving other important financial goals like saving for a comfortable retirement.
4. Support your nearer term goals.
Speaking of financial goals, let’s talk about the things you’d like to accomplish in the next five to 10 years. This could be things like:
- Saving for a down payment on a home
- Making improvements on a home you already own to increase its property value
- Investing in your career by furthering your education or earning a professional certificate to improve your salary potential
Money from an inheritance can help you fast track such financial goals.
5. Invest for your family’s future.
It’s also a good idea to look further down the road by investing some of your inherited money in things like a traditional or Roth IRA to supplement any retirement savings you have in 401(k)s or other employer-sponsored plans.
Once you max out your annual IRA contribution limit (as of 2023, $6,500 if you’re younger than 50 and $7,500 if you’re 50 or older), you can put additional funds in other investment vehicles like stocks, bonds or mutual funds. This beginner’s guide can help you get started if you’re a novice investor.
With a larger inheritance, you might also consider investing in tax-advantaged 529 funds to provide for all or part of your kids or grandkids education.
6. Donate if that’s important to you.
After taking care of your personal financial needs and goals, you may be inclined to donate to a charity in honor of your deceased loved one or to an organization that is personally important to you. This is a beautiful gesture that may even provide you with a tax advantage. If you donate to a qualified organization and itemize your tax return, you can deduct your charitable contribution.
7. Make sure you have an estate plan.
Receiving an inheritance is a great reminder that you need an estate plan of your own. This includes a last will and testament, one of the most important financial documents because it indicates how you want your assets to be distributed upon your death. Otherwise, your state’s probate court will decide.
Another key piece of a solid estate plan is a living will, which indicates your preferences about lifesaving medical interventions. Additionally, you need a power of attorney for your healthcare decisions and one for your financial decisions should you become incapacitated or unable to communicate your wishes yourself.
With your estate plan established, you can rest easy knowing that your personal dignity, financial legacy and loved ones will all be protected in the event something happens to you.