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7 simple tips for maximizing inherited wealth.

Student loan debt, rising housing costs, and a lack of retirement savings could make a pending inheritance a welcome relief. Even a modest wealth transfer from a deceased loved one could provide a life-changing financial boost. But an inheritance often comes with complex emotions that could interfere with smart financial choices. Without careful planning, you might see the money dwindle away without much to show for it.

Here's how you can preserve and possibly grow your inheritance.

  1. Resist lifestyle creep.
  2. The temptation to immediately increase your spending and adopt a more lavish lifestyle when you receive an influx of money is real. It's easy to get caught up in the excitement and start living beyond your means. However, lifestyle creep can quickly deplete your inheritance.

    Instead, stick to your current lifestyle by sticking to a budget. Avoid product and service upgrades as well as large purchases until you've adjusted to your new financial situation. For example, rather than immediately spending the money on a new luxury vehicle, continue driving your existing vehicle for at least the next several months.

  3. Park your money.
  4. “Receiving an inheritance can be bittersweet and emotionally overwhelming,” says Sam Toigo, CFP®, senior financial planning analyst at Commerce Trust. It can also lead to impulsive financial decisions. Depositing the inheritance into a savings account puts the money at a safe distance and allows time for emotions to settle before making any major moves. “Slow down, talk to the right people, and come up with a plan before spending your first dollar,” Toigo continues.

    Open an FDIC-insured high-yield savings account and deposit the funds. Leave the money untouched until you have a solid financial plan in place.

  5. Confirm your tax liability.
  6. The state of residence of the deceased and your familial relationship could affect whether you must pay tax on the inheritance. Ignoring tax requirements could result in penalties, interest charges, and legal issues.

    Speak with a qualified tax advisor to understand your obligations and avoid unnecessary financial surprises.

  7. Spend wisely.
  8. Using all of the money to buy frivolous items does little to ensure your future financial stability. Impulse purchases, like luxury clothing and high-tech gadgets, may quickly decrease in value while providing minimal long-term benefit.

    Consider using most of the inheritance to invest in your future. Buying assets with long-term benefits, such as real estate, is a smart strategy as it can help preserve and grow the inherited wealth.

  9. Increase your retirement nest egg.
  10. Consult with a financial advisor to determine the best retirement account options based on your age, income, and long-term goals.

  11. Enjoy a planned splurge.
  12. Too many restrictions on spending could result to self-sabotage. Allow yourself to indulge responsibly by creating a plan. Decide on a reasonable percentage or fixed amount of your inherited wealth that you're comfortable setting aside for personal enjoyment. Budget for specific splurges or indulgences within that predetermined limit.

    For example, you might earmark $2,500 (10%) of a $25,000 inheritance for a cruise, upgraded wardrobe, or coveted luxury item. Then, invest the remaining $22,500 with your financial future in mind.

  13. Consider your legacy.
  14. Being on the receiving end of a wealth transfer places you in a unique position. You now have a dual perspective when considering what and how much you want to leave behind to make a lasting impact. This might include money left over from the wealth transfer plus additional assets you had planned to pass down to future generations.

    Getting creative with your own wealth transfer could save your beneficiaries time and money. For example, you might create a charitable remainder trust that provides income for your beneficiaries while supporting your favorite nonprofit organization. This does double duty by leaving a lasting legacy and potentially reducing your overall tax burden.

Contact your local Commerce banker for additional actions you can take to successfully manage a wealth transfer. They can walk you through the steps necessary to protect your inheritance based on your situation.

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Disclosures:

The opinions and other information in the commentary are provided as of 5/03/24. This summary is intended to provide general information only and may be of value to the reader and audience.

This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Commerce Trust does not provide advice related to rolling over retirement accounts.

Commerce Trust is a division of Commerce Bank.

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