To effectively preserve and grow one’s wealth requires a comprehensive and well-thought-through plan. This is especially true when trying to manage newfound wealth such as an inheritance, an insurance or divorce settlement, or proceeds from the sale of a business or property.
In these situations, you are likely to find yourself unsure of the questions, let alone the answers, that you need to contemplate to create the required plan. The lack of experience managing events of this type can initially leave you overwhelmed and confused about the next logical steps.
Identifying the key questions to ask yourself is a great place to start:
- What do you intend to do with these assets?
- Is paperwork required to transfer them into your name?
- How should you invest these new funds?
- What are the short- and long-term tax implications of receiving the assets?
- Are you subject to state-specific tax or inheritance laws?
- Do your will and estate planning documents address your new circumstances?
- Will this affect your Social Security or other sources of income?
Fully addressing each of these questions can be challenging even at the best of times. Unfortunately, being the recipient of newfound wealth is often the result of emotionally charged circumstances. Your ability to make impactful financial decisions may be complicated by the strong emotions that accompany the additional wealth.
At Eagle Ridge Investment Management, LLC (“Eagle Ridge”), we work closely with clients to help them navigate their newfound wealth and manage other important financial decisions. Our financial planners and investment managers have a wealth of experience, having worked with individuals and their families for, in some cases, decades. Based on this knowledge, we’ve summarized below the key fundamentals you should address when building a plan to preserve and grow newfound wealth.
Financial Planning and Investing
A large inflow of money can leave you overwhelmed, facing financial decisions that were not previously on the table. You may have some debt to pay off, a desire to purchase real estate, a need to secure a comfortable retirement, or simply want to help fund your grandchildren’s education. Completing a comprehensive financial plan can help you prioritize your goals and determine what steps to take to achieve them. Evaluating your assets and liabilities, and projecting your future income and expenses, puts you in a position to make more informed financial decisions.
Before rushing to invest your new assets, it is essential to have a thorough understanding of which asset types and investment vehicles you have received. For instance, you may be dealing with individual stocks in a taxable brokerage account, exchange-traded funds (“ETFs”) in a tax-deferred IRA, or insurance proceeds inside a trust. You also need to determine if the assets will be available to you immediately or distributed over time.
Once you have a solid grasp of the components of your portfolio, you can turn your attention to investing them in a way that aligns with your personal requirements. An effective investment plan will include the following:
- Understanding your risk tolerance (your willingness and ability to take risks)
- Discussing your return expectations and what may be achievable
- Determining an appropriate asset allocation strategy based on your goals and risk tolerance
- Identifying any investment constraints or preferences, such as ESG
- Implementing your investment strategy using the appropriate investment vehicles (i.e., stocks or fixed income)
- Understanding any fees involved (including those related to the investment management and wrapped into the underlying investment products, such as mutual fund fees and commissions)
- Monitoring the results of your portfolio
Another challenge that often comes with an increase in wealth is a host of complex tax issues. For instance, when an individual passes away their estate may be subject to both Federal and State Estate taxes. In addition to Estate taxes, there are six states who impose a separate Inheritance tax on the individual receiving the assets.
Even if you are not impacted by estate or inheritance taxes, there are various other tax issues to consider, such as:
- Tax treatments vary for different asset types
– Life insurance proceeds are generally tax-free to the recipient
– Some assets are eligible for a step-up in cost basis which reduces capital gains upon selling
- Future income earned from the new assets will increase your reported income and may change your tax bracket
– Includes the interest, dividends, and capital gains from the investment portfolio as well as earnings from income-producing assets like a business or real estate
- Inherited retirement accounts may be subject to an annual required minimum distribution (“RMD”)
– RMDs will vary in size depending on your relationship to the account owner, the account owner’s age, the beneficiary’s age, and the value of the account
– It is imperative to get these rules right because the IRS imposes stiff penalties for insufficient distributions
- Real estate comes with the added costs of appraisals, maintenance, utilities, and property taxes
Legal considerations represent the third component of any plan for newfound wealth.
In the case of inheritance, you may have to wait for assets to pass through probate, which is the legal process through which an estate’s assets are distributed under the guidance of a court. Any assets passing through probate will be managed by the executor of the estate. The executor’s job is to locate all assets, determine date of death values, notify any creditors, pay off any debts, file tax returns, and, finally, distribute the estate to heirs.
Whether you are receiving money from an inheritance or another event, it is critical to address the legal factors involved. These can include:
- Determining if your estate planning needs have changed
- If so, updating or drafting new legal documents which may include:
b. Healthcare directives
c. Durable Power of Attorney
- Ensuring your beneficiaries are up to date on all accounts and insurance policies
How Eagle Ridge Can Help
Recipients of newfound wealth can seem to be in an enviable position with a substantial pool of assets that can open doors to new possibilities, but it also presents a new set of complexities. Tackling all these issues on your own can be an overwhelming exercise that may not be effective. We believe that to ensure the most advantageous outcomes, most recipients are best served by assembling a quality team of trusted advisors.
Since 2008, Eagle Ridge has been helping families and individuals to preserve and grow their wealth. Our team is comprised of dedicated investment professionals and financial planners who are well-credentialed, have a high level of expertise, and decades of experience. Each client works directly with a Partner of the firm and supporting team members. Every new relationship starts with a comprehensive financial plan followed by an agreed-upon investment plan. In addition, we coordinate with our clients’ other professional advisors (accountants, attorneys, etc.), to ensure all financial bases are covered and they are in the best position for success.
Addressing the key fundamentals of Financial Planning and Investing, Tax Implications and Legal Considerations will set you on the path to successfully preserving and growing your newfound wealth. If you are interested in benefiting from our experience and expertise, please contact us to set up a meeting.