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How to Protect Your Inheritance

May 02, 2016 2 min read

Key Takeaways

  • Take a deep breath, wait three months, exhale ;-)
  • An inheritance does not replace a retirement plan. Repeat.
  • Get thee to a good estate planning atttorney.


When a close relative passes away, it can, of course, be a difficult emotional period. Add to that the experience of receiving a sizable inheritance, and it’s understandable if the beneficiary feels a bit overwhelmed.



However, it’s crucial that you make the proper financial decisions regarding your new wealth; too many simply do not. Research shows that Americans deplete 90% of inherited family wealth by the third generation. At the same time, studies indicate that, over the next few decades, some $30 trillion may be transferred to heirs by the baby boomers.

There are ways to ensure you honor your loved one’s legacy by protecting the family fortune and securing your own financial future.


Take a breather

New wealth comes with new responsibilities.

You may buy a splurge item or two after you receive your money, but then you should do your best to hold off on big-ticket items until you have a clear plan and budget; experts recommend taking a three-month cooling-off period after collecting an inheritance. Try to ensure you don’t make any impulsive moves based on high emotions.


Pen your plan

If tight cash flow has prevented you from maximizing your retirement plan contributions, your new inheritance may provide you the opportunity to add more to your 401(k) or IRA accounts. Increasing your 401(k) contribution rate, even by 1%, can make a significant impact over the long term.

If your emergency savings account has also been alarmingly empty, your new wealth could allow you to fund it to sufficiently cover unexpected events.

Once you feel better-prepared in the retirement realm and more able to financially handle an unexpected life event, you can start paying off any outstanding debt. You may want to begin with the highest-interest loans (typically credit card debt) to realize the best return on your payments. However, if it will better-inspire you to rid yourself of your debt, you can also begin by tackling the card with the smallest balance.


Stall your send-off

Although receiving an ample inheritance might make it more tempting to consider exchanging your 9-to-5 job for a life of more freedom, take a step back before you make such a move.

Your inheritance does not replace your retirement plan, which may be matched by your employer, so rather than call it quits, think about the benefits your job provides, and most important, do the math on how much you really need for the retirement you want. Even if the amount you inherited seems like a large number, it may not be enough to last through your retirement and pass on to future generations.


Clarity, then charity

Using some of your inheritance to contribute to charities that are meaningful to you is a great philanthropic move. Just make sure you’ve first solidified your overall plan, including the taxation and future direction of your inheritance.

If you do plan to donate to charity, vet out the most reputable organizations, then contact a tax professional to devise a strategy before you start writing checks.


Continue the legacy

Estate planning is key to appropriately handling your inheritance and continuing your loved one’s legacy. If you are able, help fund college savings plans for future generations of your family to help ensure their empowerment in managing the inheritance once it passes to them.

Be sure to also have a will or trust in place, as well as an appointed party who is apprised of the continued vision and location of the inherited assets. A trust, in which assets are handled by an appointed trustee, can save your heirs on taxes, and can also protect them from creditors, who are often not able to seize assets set up in a trust. It can also help less financially savvy heirs to better-manage the estate when it becomes theirs. You don’t have to have a huge estate for a trust to be the best option; it’s a misconception that trust funds are only for the very rich.

When setting up an irrevocable trust, which is essentially set in stone, the assets officially no longer belong to you, so they are not taxed as part of the larger estate; with a revocable trust, you can change your mind and modify or even dissolve the trust, and the assets remain a part of the larger estate.

You can also share the wealth before you die by giving gifts to relatives; this provides the emotional benefit of seeing them enjoy the money and the financial benefit of reducing the size of your estate, which could be of great help if you inherit a taxable amount, or close to it.

As of 2016, you can give up to $14,000 in individual amounts without being hit with the gift tax. There is no limit on the amount of people you can give this gift to – the amount for each just has to be $14,000 or less. If you’re married, you and your spouse can both give a tax-free $14,000 gift to each recipient, so this allows for $28,000 per person.

A more extreme move that might work for some is to disclaim the inheritance outright and let it pass on to the next generation without ever becoming a part of their own taxable estate.

Keep in mind that the federal estate tax exemption currently tops $5 million; this means that, as of 2016, there are no federal taxes due on an estate under the amount of $5,450,000. State estate taxes vary, with some states having no estate tax at all.

A good estate-planning attorney can help you craft the kind of plan that works best for you and your family.


What you can do next

Despite the emotions you may be feeling, take a step back to focus on securing your financial future and arming the next generation with the know-how to protect the legacy you’ve been entrusted with. If you manage things well from the get-go, the money may be able to stay where it belongs: in the family.

If you secure tomorrow, you can enjoy today.

Help make sure your loved ones are protected if something happens to you, with Prudential Life Insurance.

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