Wealth Transfer And How To Position Your Portfolio When You Inherit Assets
Between 2022 and 2042, $84 trillion will pass from one generation to another in the U.S. alone, according to UBS. That's the greatest transfer of wealth in history. Chances are, you are going to be part of that transfer one way or another.
In this article, we explore the wealth transfer process and discuss how you might position your portfolio if (or when) you inherit assets.
What Is a Wealth Transfer?
A wealth transfer refers to the process of passing financial resources from one individual or generation to another.
Wealth transfers may involve a range of assets, including real estate, investments, business ownership, cash, and personal belongings. These transfers can have profound implications for both the giver and the recipient, influencing financial security, lifestyle, and future opportunities.
Receiving an inheritance can increase financial well-being, but only if you take steps to avoid spending too much or investing poorly. Reports say that 70% of wealthy families lose their wealth by the second generation. By the third, 90% have lost it.
Why do people lose inherited wealth and how can you hang onto it?
Challenges Beneficiaries Face
In one survey, only 42% of people who expect to receive an inheritance actually believe they know how to handle it. Data suggests the other 58% are right — their inheritance could go up in smoke.
Whether you leaving assets to your loved one, or inheriting them consider these challenges surrounding inherited assets:
Emotional Strain: Dealing with the loss of a loved one can be emotionally overwhelming. Beneficiaries may experience grief, sadness, and other emotions that can affect their decision-making skills.
Managing Expectations: Inheritances might not always match beneficiaries' expectations. Unrealistic assumptions about the size or nature of the inheritance can lead to disappointment or financial mismanagement.
Financial Wisdom and Planning: Beneficiaries may struggle with how to manage and invest the inheritance wisely, especially if they lack financial literacy or experience.
Complex Assets: Inheritances can include various assets like real estate, stocks, businesses, and more. Managing and liquidating these assets can be intricate and time-consuming, requiring knowledge and expertise.
Family Dynamics: Inheritances can sometimes exacerbate family tensions, especially if there are disputes over the distribution of assets.
Legal and Probate Processes: The legal processes involved in transferring assets from the deceased to the beneficiaries can be complex, costly, and time-consuming if proper planning did not take place on the front end.
Inflation and Market Changes: The value of inherited assets can fluctuate due to market changes and inflation. Beneficiaries may need to be prepared for these shifts and consider strategies to protect their inheritance from erosion over time.
Navigating Your Inheritance
To navigate these challenges, beneficiaries should consider seeking professional advice from financial planners, accountants, estate attorneys, and counselors to help them make informed decisions, manage emotions, and plan for a secure financial future.
Start by taking stock of what you have inherited. Determine the nature of the assets and their potential value. This will help you assess the potential risks and opportunities that come with your inheritance.
Consider your goals. What are you looking to achieve with your inherited assets? Do you have debt you should consider paying off? Are you on track for retirement or other savings goals? Do you have charitable intent? Taking a step back to consider your financial circumstances and objectives will allow you to make better decisions for your family's financial future.
Consider your investment goals. Again, what are you looking to achieve with your inherited assets? Are you focused on long-term growth, income generation, or preservation of capital? By evaluating your investment goals, you can determine the appropriate portfolio positioning that aligns with your objectives.
Evaluate your risk tolerance. Inheriting assets can sometimes come with unexpected challenges or changes in market conditions. Understanding your comfort level with risk will help you determine the appropriate level of risk exposure in your newly inherited investments .
Finally, seek professional guidance. If you've inherited a serious financial windfall, you likely need to build a team to help you manage your wealth. This could include a tax lawyer, real estate agent, investment advisor, CPA, and estate planning attorney.
Evaluating Your Investment Goals
Evaluating your investment goals is a crucial step in managing your inherited assets.
Are you looking to generate a steady income from your inherited assets? Or are you more focused on long-term growth and building wealth over time?
Additionally, think about your time horizon. Are you planning to hold onto your inherited assets for the long term, or do you anticipate needing to access the funds in the near future? Your time horizon (when you need this money) will impact the types of investments you should consider, as well as the level of risk you can afford to take.
Every investor has their own viewpoint of taking risks. Some individuals are more conservative and prefer low-risk investments, while others are more willing to take on higher levels of risk for potentially greater returns. By evaluating your risk tolerance, you can align your investment strategy with your comfort level.
Finally, consider any personal values or beliefs that may influence your investment decisions. Some inheritors of wealth may prioritize socially responsible investing or have specific industries or causes they wish to support. Evaluating your investment goals in the context of your values can help you align your portfolio with your beliefs.
Inherited Assets and Current Investments
Incorporating inherited assets into your investment portfolio involves assessing their compatibility with your existing investments. Synergies can be sought through diversified asset allocation, aligned risk profiles, and shared investment goals. It can be essential to consider potential tax implications and ensure the inherited assets contribute effectively to your financial objectives. Seeking professional advice, if needed, ensures a well-informed approach to integrating inherited assets into your portfolio effectively.
Evaluating the Tax Implications of an Inheritance
Inheriting assets can have significant tax implications that vary depending on your jurisdiction and the nature of the assets you have received. It is crucial to understand the potential tax obligations associated with your inheritance to avoid any surprises and ensure compliance with the law.
Certain tax benefits may be available to you as an inheritor. For example, if you inherit a property, you may be eligible for a step-up in basis, which can reduce your capital gains tax liability if you decide to sell the property later.
In most cases, there will be little capital gains tax due if you sell or transfer the inherited assets in a timely manner. However, there are certain times when this is not the case. Most often, it depends on the type or title of the asset you inherit. It's essential to know the tax basis of the assets, which (assuming a step-up in basis) is usually their fair market value at the time of inheritance, as this will impact the amount of tax you owe when you sell them.
Seeking Professional Guidance for Wealth Management
Seeking professional guidance is a crucial step when managing inherited assets. While it may be tempting to handle the process on your own, the complexities and potential pitfalls associated with managing inherited assets make it highly advisable to consult with experts who specialize in wealth management and estate planning.
A financial advisor can provide valuable expertise and guidance throughout the entire process. They can help you evaluate your current financial situation, understand your investment goals, and assess the risks and opportunities associated with your inheritance. A financial advisor can also assist in developing a personalized investment strategy that aligns with your objectives and risk tolerance.
In addition to a financial advisor, it may be beneficial to consult with an estate planning attorney or tax professional. They can provide guidance on the legal and tax implications of your inheritance, ensuring that you comply with all necessary tax obligations and maximize any available tax benefits.
Managing Your Inherited Wealth for God's Glory
Managing your wealth for God's glory is a perspective that brings a unique dimension to the process of managing inherited assets. As believers, we are called to be good stewards of the resources that God has entrusted to us, including the wealth that we inherit. This means that we should view our wealth not only as a means for personal gain but also as a tool for advancing God's kingdom and blessing others.
When managing your inherited assets, it is important to consider how your financial decisions align with your faith and values. This may involve incorporating principles of generosity, integrity, and compassion into your financial decisions, investment strategy, and portfolio positioning. For example, you might choose to allocate a portion of your inherited assets towards charitable giving or invest in companies that align with your ethical beliefs.
Additionally, managing your wealth for God's glory involves being mindful of the impact that your financial decisions have on others. It means considering the needs of your family, community, and the wider world when making financial choices. This could involve supporting causes and organizations that align with your values or using your wealth to create opportunities for others.
Ultimately, managing your wealth for God's glory is about recognizing that your inheritance is a gift from God and using it in a way that honors Him. It is a call to stewardship, responsibility, and generosity. By aligning your financial decisions with your faith, you can make a positive impact with your inherited assets and ensure that your wealth is used for God's glory.