How Advisors Can Help Clients Invest an Inheritance | Financial Advisors


A large inheritance isn’t the most common occurrence, with only 21% of Americans receiving one, but 21% of the US population is still nearly 70 million people, and you’ll want to be fully prepared if one of these people happens to be your client. Here are the best practices financial advisors can employ when guiding clients through this potentially life-changing event:

  • Manage expectations vs. reality.
  • Break down the inheritance.
  • Minimize your client’s tax burden.
  • Understand your client’s needs.
  • Look at debt.

Manage Expectations vs. Reality

Managing expectations can go a long way towards laying the foundation for how you and your client handle the inheritance. Your client may not know what to expect or have their sights set on a high number. However, according to the 2019 Survey of Consumer Finances, the average inheritance ranges from $76,200 to $92,700. If your client is expecting a large windfall, help them maintain realistic expectations by explaining that expenses during retirement can quickly drain investment and bank accounts.

For example, the national average cost of a private room in a nursing home was $108,405 per year, according to Genworth’s Cost of Care Survey for 2021. It costs an average of $61,776 to hire a home health aide for 44 hours per week year-round. According to the AARP, cancer treatment costs run in the $150,000 range. A person with dementia can spend more than $415,000, on average, during the last five years of life.

Even if health is on their side, the anticipated inheritance could get eaten up by checking off bucket-list items.

Break Down the Inheritance

Once your client receives the inheritance, the first step is to ensure that you and your client understand what’s included. Knowing the makeup of the assets is an important step, since an inheritance can consist of property, investments, jewelry, life insurance policies or even a business that’s still up and running.

Remember, your client isn’t a financial professional, and they might not necessarily know what’s valuable and what isn’t. For this reason, you’ll want to go through the inheritance together to get a good idea of ​​what your client now owns.

Minimize Your Client’s Tax Burden

Before you do anything else, you’ll want to prioritize lowering your amount client pays in taxes. This is where things will get a bit tricky, as it will depend on what type of inheritance your client is receiving, the form they receive it in and the tax implications.

Generally, inheritances are not considered income for federal tax purposes, but a handful of states – Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania – impose a tax. You may also have to consider estate taxes if the inheritance sum is over $12.06 million in 2022 or $12.92 million in 2023. Unless your client receives a large sum, you won’t have to worry about this direct tax.

However, your client could face other taxes if they don’t have proper guidance. For example, your client may rush to liquidate a large portfolio of stocks they inherited to get access to the cash. But doing so could result in a heavy capital gains tax. Unless your client wants to immediately fork over a percentage of their inheritance to Uncle Sam, you’d most likely want to advise your client against selling. Again, this will depend on your client.

Understand Your Client’s Needs

In some cases, the inheritance might be the first time your client has encountered a large sum of money. It could very well be a life-changing moment for them. Sit down with them and revisit their short, medium and long-term financial goals. The odds are that you’ve already done this, but it’s worth another conversation now that their circumstances have changed.

Some things to consider are:

  • Has this inheritance changed your client’s risk tolerance?
  • What are a few of your client’s life goals? Could this inheritance help them achieve any of these goals?
  • How does your client want to spend the money?

Once you’ve both gotten on the same page, you can start looking at different ways to use the inheritance. But remember that there is no rush to make decisions. In many cases, inheritances can enter a person’s life quickly and unexpectedly. For example, a close relative might pass away suddenly and leave your client with a hefty life insurance policy. If your client didn’t expect to have this amount of money, they might need time to grieve before planning.

Look at Debt

The very first thing that you and your client should do is look at your client’s debt. Typically, paying down debt is universally the smartest financial decision. Consider mortgages, student loan debtcredit card balances, auto loans, business loans and personal loans.

Even though paying down debt isn’t always the most exciting decision, it’s usually the right one. Many people don’t get a second chance to instantly eliminate part of their outstanding debt. Don’t let your client waste theirs!




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