How to Make Your Inheritance Last

Most people believe that receiving a large inheritance from a loved one would be life-changing.  At least one study, however, found that about one-third of Americans who had received an inheritance eventually experienced a decrease or no change in their wealth after receiving the inheritance, meaning that they most likely spent everything they received.^[1] For baby boomers who received an inheritance of $100,000 or more, nearly one in five spent it all.^[2] If you are preparing to receive an inheritance, there are several steps you can take to ensure that your funds will last longer than a few years.

Do not make any hasty decisions. Once you receive your money, do not make any hasty decisions about what to do with it. While you are crafting your long-term financial plan, consider taking some of the following actions:

• Park the funds in a safe place such as a savings account, money market account, or certificate of deposit. However, be aware that the FDIC insures these types of accounts only up to $250,000 per depositor, per insured bank, for each account ownership category.^[3]
• If you do not already have an emergency fund, set one up to cover a minimum of six months of expenses. If you already have an emergency fund, consider adding additional funds to cover one year of expenses.
• If you are married, you will need to decide early on if you want to keep your inheritance in your sole name in an individual account or place the funds in an account jointly owned with your spouse. This decision largely centers on whether you want to protect your inheritance from being considered a marital asset if you ever get divorced in the future. Also, it is important to know that even if you put the inheritance in your sole name, spending money from that account on joint or family expenses may render the inheritance account a marital asset, depending on the rules in your state. You should consider seeking legal counsel before you take custody of your inheritance.
• If you are considering giving some of your inheritance to your children during your lifetime, you could invoke a gift tax or incur negative income tax consequences if the gift is not structured properly. You should only proceed with gifting once you understand all of the potential consequences.
• If you have significant debts or liabilities, you may consider using a portion of your inheritance to pay the balance off or lower it.

Still working? Put away more toward your retirement. Some financial experts estimate that in order to comfortably retire, you should have one year’s worth of salary saved by the time you are 30 years old, three times your salary by the time you are 40 years old, six times your salary by the time you are 50 years old, and eight times your salary by the time you are 60 years old.^[4] If you are working and are not contributing the maximum to your 401(k), bump up your withholding, particularly if you are not meeting your employer’s match. If your employer does not offer a 401(k), start funding an IRA. Note that if you have inherited a traditional IRA, any withdrawals you make will be included in your taxable income. 

Hire a team of professional advisors. You will need a team of professionals to help you develop long-term plans to make your inheritance last. A financial advisor will help you analyze your current finances and build a solid financial foundation that includes investments, credit and debt management, college savings, and retirement planning. Your advisor can also help you look into the future and plan for long-term financial goals, such as purchasing a first or second home, purchasing an investment property, establishing funds for retirement, or starting a charitable foundation. An insurance agent will help analyze the necessary types and amounts of insurance (life, long-term care, and liability) to ensure that you and your family are protected. A tax professional will help you analyze cash flow and create a plan to minimize capital gains and other income taxes. We can help you create or update your estate plan (everyone needs a will or revocable trust, medical directives, and a durable financial power of attorney), decrease or eliminate estate taxes (federal and/or state), set up a gifting strategy, meet your charitable goals, create a family legacy, and protect your inheritance from creditors, predators, and lawsuits. 

If your inheritance is large enough, it has the potential to last throughout your lifetime. But do not attempt to create a plan to make it last as long as possible on your own. We are here to answer any questions you have about receiving, growing, donating, protecting, and ultimately passing on your inheritance to your loved ones. You can contact us at (408) 371-6000 or info@sowardslawfirm.com. 

^[1] Jeff Grabmeier, Most Americans Save Only about Half of Their Inheritances, Study Finds, Ohio State News (Mar. 14, 2012), https://news.osu.edu/most-americans-save-only-about-half-of-their-inheritances-study-finds—ohio-state-research-and-innovation-communications.

^[2] Id.

^[3] Deposit Insurance at a Glance, FDIC (Apr. 1, 2024), https://www.fdic.gov/resources/deposit-insurance/brochures/deposits-at-a-glance.

^[4] How Much Do I Need to Retire?, Fidelity (Feb. 15, 2024), https://www.fidelity.com/viewpoints/retirement/how-much-do-i-need-to-retire.