Navigating Inheritance: A Financial Advisor's Guide to Planning for Client Windfalls
People already struggle with grief, complex family dynamics, and the weight of responsibility without the added challenge of an inheritance. Planning for inheritances takes time, intention, and the guidance of a financial advisor.
This article will provide practical strategies and insights for advisors to help clients plan for and manage inheritances effectively. Read on to learn how financial planners can use Asset-Map to help clients make informed decisions about their inheritance.
The Emotional and Financial Impact of Inheritance
An inheritance brings emotions and financial impact that clients may be unprepared for. It can take time to manage an inheritance depending on the disbursement method and asset class.
Emotional Considerations
Emotions will likely run high when preparing for newfound wealth. Grief of losing a loved one and complex family dynamics are challenges associated with inheritances. Additionally, the inheritor may feel a weight of responsibility receiving the wealth of a parent, grandparent, etc. Financial advisors must be compassionate and gentle when working with clients to ensure a smooth distribution process.
Financial Realities
An inheritance isn’t always straight cash that can be strategically invested with a financial advisor. Other forms of inheritance include real estate or property and investments such as stocks, bonds, or alternative investment classes.
The tax implications for each type of inheritance will vary, making working with an advisor beneficial for family members. While there isn't a federal inheritance tax, and typically, the estate pays the estate tax owed, it's still important to work with a skilled tax professional.
Client Discovery
As a financial planner, you must understand and actively listen to a client’s individual circumstances and concerns. Gauge their emotional state to guide you in your conversations with clients. Some clients may be more fragile during this period than others, and you should consider their emotional state when managing an inheritance.
Key Planning Strategies for Inherited Assets
So, what are the best options for inherited assets? When someone receives an inheritance, they may have no clue what to do next. A financial advisor can guide clients on investment strategies, debt management, and more.
Immediate Actions
When clients receive an inheritance, they should immediately secure the assets to ensure they are legally transferred and protected. This can include getting proper documentation of the inherited assets and transferring them into the clients’ names. Clients should also avoid emotional spending or impulsive choices during a delicate time and instead consult with professionals.
Debt Management
A financial advisor may suggest that their clients pay down high-interest debt to improve financial stability. Clients can use inherited funds to pay debts with higher interest rates to save money in the long run and improve their financial health. Also, a financial advisor may recommend pouring some of the inheritance into clients' emergency fund if it is not well-padded.
Investment Planning
Another option clients can pursue is investing the inherited assets. A financial advisor can help identify clients’ risk tolerance, time horizon, and financial goals. Investment planning is a great way to utilize an inheritance and grow wealth over time.
Tax Planning
Tax planning is an important part of receiving an inheritance. Financial advisors can work with clients to minimize their tax liabilities, including estate and income taxes. Selling appreciated assets quickly can help clients avoid capital gains taxes and lock in gains. Clients can also use tax-loss harvesting if the market declines after an inheritance.
Estate Planning Integration
Clients likely already have a pre-existing estate plan that outlines how they would like their estate distributed. To integrate inherited assets into the existing plan, a financial advisor can review the current plan and make updates to rebalance asset distribution.
Helping Clients Make Informed Decisions
It is a financial advisor’s duty to help clients make informed decisions. Advisors can use their expertise to help clients avoid common mistakes, develop long-term plans, set realistic expectations, and plan for charitable giving.
Avoiding Common Pitfalls
It is important for people to work with financial advisors when receiving an inheritance to avoid common pitfalls like impulse spending and poor investment decisions. Many people struggle to resist the urge to go on shopping sprees after inheriting a lump sum of money. Others invest it poorly, resulting in a loss of wealth. Financial advisors should guide their clients to make good, well-thought-out decisions.
Developing a Long-Term Plan
Financial advisors should work with their clients to create a comprehensive financial plan that incorporates the inherited assets. If a financial plan has already been created, it should be re-evaluated to strategically include the inheritance.
Setting Realistic Expectations
Sometimes, a sudden influx of wealth can be overwhelming. Financial advisors should help clients understand the potential impact of an inheritance on their overall financial picture. They should maximize the effect through a strategic, long-term plan to set clients up for their futures.
Philanthropic Planning
Clients often wish to give to charitable organizations as part of their inheritance planning. Financial advisors can help clients determine which organizations to contribute to and how to do so most effectively.
The Advisor's Role in Inheritance Planning
We’ve discussed key planning strategies and how to help clients make informed decisions, but what is an advisor’s real role in inheritance planning? What are the areas that financial planners help clients with the most?
Providing Objective Guidance
First and foremost, a financial advisor’s role is to be a trusted and objective advisor during a potentially emotional time. The death of a loved one brings about feelings of loss, grief, and even depression. Financial advisors are guiding lights to help clients make the best decisions to support their financial goals.
Facilitating Family Communication
Financial advisors can also help facilitate open and honest communication among family members during the inheritance planning process. Advisors sometimes have to work around complex family dynamics to foster open lines of communication. Family conversations are critical to ensure everyone is on the same page about inheritance decisions.
Coordinating with Other Professionals
Financial advisors must collaborate with other professionals, such as estate planning attorneys and tax advisors, to help their clients succeed in managing their inheritance. Financial planners don’t have unlimited knowledge and must rely on others.
Utilizing Technology
Financial planning software and visual tools, like Asset-Map, help clients visualize and manage their inherited assets effectively. Asset-Map is a visualization tool that encourages in-depth client conversations around financial planning. Technology that simplifies clients’ financial pictures can help forge a path to financial stability. With Asset-Map, clients can more easily grasp their financial situation, making inheritance planning smoother for advisors.
Creating a Path to Financial Well-Being
Proactive inheritance planning is vital for those receiving any type of inheritance. Whether it is property, cash, or investments, working with a trusted financial advisor can make all the difference. Financial planners serve as guides during the difficult period of losing a loved one and managing an inheritance.
Financial advisors should discuss inheritance planning with clients when creating a comprehensive financial plan. Asset-Map supports advisors in having meaningful planning conversations with clients by providing clear visuals of their financial landscape. Learn more about how Asset-Map can elevate your practice today by scheduling a free demo.