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The Great Wealth Transfer: 5 Tips for Inheriting Assets

by , | Updated: May 17, 2024 | Published: May 17, 2024 | Insights

5 essential steps for inheriting assets with the great wealth transfer

The Great Wealth Transfer: 5 Tips for Inheriting Assets

5 Steps to take if you plan to inherit wealth during The Great Wealth Transfer

 

As the Baby Boomer generation continues to age, there will be a massive transfer of wealth from their generation to their heirs. Over the next 20 years in the United States, it is expected that an estimated $84 trillion will be transferred from one generation to the next. This is what many refer to as “The Great Wealth Transfer”.

Many are unaware of the nature and quantity of the assets they may receive. However, inheritors who are informed of the windfall heading their way can benefit greatly from planning for the financial and tax implications of the transfer.

With any large financial windfall, it is important to understand how to protect, grow, and minimize taxation of the assets. Given the complexity of the tax code and estate law facing the inheritors of this wealth, it is important to understand how to efficiently receive and manage the assets received from loved ones.

There are 5 essential steps to proactively and efficiently manage assets received during The Great Wealth Transfer.

Understanding the Type of Assets that will be Inherited

All inheritances are different. Not all are simply cash passing from one person to the next.

Assets can take many different forms and be stored in various locations. Assets can be in the form of IRA accounts, brokerage accounts, bank accounts, trusts, physical property, real estate, business interests, or life insurance policies. All of these assets require a different inheritance process, and each will have different tax and reporting requirements.

For example, financial assets such as stock held in a brokerage account will receive what is called “step-up basis” when passed via the current owner passing away. This step-up in basis will decrease or eliminate the taxes associated with capital gains in the stock positions or real estate when it is eventually sold. It is the responsibility of the inheritor to update this information with the custodian who is holding these stock positions so it is accurately reported to the IRS

Aside from understanding how each asset is taxed, there are also certain restrictions or requirements that can be tied to the receiving of certain assets. For example, inherited IRAs can require minimum distributions annually and generally require all the funds to be withdrawn within 10 years.

Some trusts may have stipulations on when and how funds are withdrawn. Other physical assets might have stipulations on when and how they can be sold and even who they may be sold to. It is critical that inheritors thoroughly understand their rights and obligations imposed by the inheritance before making significant decisions or transactions.

Consider the Tax Implications

Once it is understood what type of asset will be received, it is important to understand how each asset will be taxed, and what types of tax reporting the IRS requires. Money withdrawn from retirement accounts or “pre-tax” accounts will be taxable to the inheritor at their marginal tax rate.

The previously mentioned step-up in cost basis may allow brokerage accounts to be redeemed completely tax free. Life insurance proceeds are generally tax free also. However, there are certain assets that are ineligible for the step-up in basis.

When business interests are inherited, inheritors will need to be aware of any K1 documents you might receive and the reporting requirements on your tax return. It is also important to understand how the business activity is taxed.

Prepare With Family

Preparation and information are key components of a successful transfer of wealth to the next generation. A vital step in the preparation process is having open and candid conversations with family and any other participants involved in your estate plan.

Open conversation can help heirs prepare for what they should expect to receive upon their inheritance. During this open conversation, individuals should also take inventory of all assets they currently own and will pass to inheritors.

Detailed instructions on where to find estate documents and who heirs need to contact are vital to the transfer of wealth from one generation to the next.

Conversation can also create a sense of shared vision amongst the various generations, which can help inheritors create or improve their financial plan and potentially align their goals. This is also a time that family members can ask questions and resolve potential conflicts before they arise.

Without a clear understanding around the structure and disposition of the estate, the settlement of the estate can be far more complex and costly than necessary. Open conversations with heirs around these topics will increase knowledge of the situation and allow inheritors to be better prepared when it is time for wealth to change hands.

Assemble Your Experts

When receiving an inheritance, it is important to focus on one’s long-term goals and how the inheritance fits into the larger picture.

Before any significant decisions are made, it is imperative that inheritors consult legal and financial professionals such as CPAs, CFP®s, and attorneys to ensure efficient administration and avoidance of any financial or tax pitfalls. Markets, laws, and personal circumstances are in constant flux, which makes regular interaction with trusted advisors key to successful management of inherited wealth within the context of an investor’s overall financial plan.

Cultivate a Healthy Mindset

It is important to have the right outlook as it relates to money and personal finance. Inheritors regularly receive far more or far less than they anticipate through estate distributions.

Creating a financial plan that is not necessarily reliant upon inheritance for success allows heirs to have peace of mind when approaching the inheritance during what is typically a stressful time. While it is important to plan for the ramifications of an inheritance, it equally important to cultivate a financial plan that is not derailed in the event that an heir receives less than originally believed or nothing at all.

Keeping emotion and stress under control can be difficult during such a transition, especially during a time that is often associated with grief and loss. Preemptive planning with your team of experts can give reassurance and comfort around heirs’ financial plans and allows one to approach the estate process with much less anxiety and stress.

Conclusion

In conclusion, navigating The Great Wealth Transfer requires foresight, preparation, and the right team of experts. Understanding the types of assets you may inherit, considering their tax implications, and having open family discussions are foundational steps. A comprehensive approach involving financial advisors, CPAs, and attorneys ensures that you can efficiently manage and protect your inheritance. By cultivating a healthy financial mindset and regularly revisiting your plan, you can navigate this significant wealth transition with confidence and clarity, ensuring a secure financial future for you and your heirs.

Need Some Help?

If you’d like some help from one of our CPAs or CERTIFIED FINANCIAL PLANNER (CFP®) advisors regarding this strategy and how it applies to you, the Rhame & Gorrell Wealth Management team is here to help.

Our experienced Wealth Managers facilitate our entire suite of services including financial planning, investment management, tax optimization, estate planning, and more to our valued clients.

Feel free to contact us at (832) 789-1100, [email protected], or click the button below to schedule your complimentary consultation today.

 

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CLAY HOSTETTER, CPA/PFS, CFP®, CIMA®

Tax Planning Manager
Clay grew up and went to high school in Roswell, Georgia. After High School, Clay attended Baylor University in Waco. While at Baylor, Clay was heavily involved with the local Waco youth through Young Life.

Clay graduated from Baylor with his Master's of Accounting in the winter of 2018. Clay took a job out of college with Deloitte working in the Multistate Tax Services group. While Clay loved the data analytics and research aspects of working at Deloitte, he realized that his skills were better used working with individuals directly. He took this passion and worked for a small Houston-based accounting firm, Cook, Johnston & Co. CPAs. At Cook, Johnston &Co., Clay worked on hundreds of individual and business tax returns. This included Income/Franchise tax, Payroll tax, and Sales tax returns. Working with his individual clients made Clay realize he would love to enter a career in financial services.

Clay has earned his Certified Public Accountant (CPA), Certified Financial Planner (CFP®), and Certified Investment Management Analyst (CIMA®) designations. He has also acquired his Personal Financial Specialist (PFS) designation.

JEFFREY G RHAME, CFP®

Partner & Senior Wealth Manager
As a Wealth Manager, Kyle McClain serves on the Investment Committee, interfaces with clients, and coordinates ongoing financial planning initiatives. He also facilitates many marketing and business development functions for the firm.

Prior to joining RG Wealth, Kyle spent time with Fidelity Institutional Asset Management as an Investment Consultant and with Merrill Lynch as a Wealth Advisor. He graduated Magna Cum Laude with a dual degree in Finance and Economics from the University of Alabama. He also completed his CERTIFIED FINANCIAL PLANNER™ program at Texas A&M University, holds the CFP® designation, and has completed his Certified Investment Management Analyst (CIMA®) designation from the Yale School of Management.

 

IMPORTANT DISCLOSURES:

Rhame & Gorrell Wealth Management, LLC (“RGWM”) is an SEC registered investment adviser with its principal place of business in the State of Texas. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that RGWM has attained a certain level of skill, training, or ability.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own CPA or tax professional before engaging in any transaction.  The effectiveness of any of the strategies described will depend on your individual situation and should not be construed as personalized investment advice. Past performance may not be indicative of future results and does not guarantee future positive returns.

For additional information about RGWM, including fees and services, send for our Firm Disclosure Brochures as set forth on Form ADV Part 2A and Part 3 by contacting the Firm directly. You can also access our Firm Brochures at www.adviserinfo.sec.gov. Please read the disclosure brochures carefully before you invest or send money.

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