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What happens if you suddenly find yourself on the receiving end of a large sum of money? Whether the money comes from an inheritance or winning the lottery, sudden wealth can stress relationships. If not handled properly, it can also put the recipient in a more difficult situation than before. Although you may understand the short-term emotional side of a windfall, what about the long-term preservation of wealth? Steps that should be taken to help cope with the shift of money include:
We will help you in setting short-, medium-, and long-term goals in order to preserve your financial well-being into the future. It is important to slow down and manage the various aspects of acquiring a large sum of money.
"Wealth consists not in having great possessions, but in having few wants." - Epictus
Passing your estate to an heir with credit problems or a gambling or alcohol addiction might not only lead to that wealth being squandered, but the inheritance could worsen the destructive behaviors.
Of course, you don’t want to disinherit your child simply because of their personal challenges. There are potential solutions that allow parents to control and incent behaviors long after they are gone, ensuring that a troubled child’s inheritance won’t be misused.1
A trust is one idea, since it can pass wealth to an heir while maintaining control over the how, when, where, and why the funds can be accessed.2
When establishing such a trust, you can appoint a trustee, who is typically an independent, third party (e.g., trust company) or family member. Appointing a family member, however, may be fraught with problems. Hypothetically speaking, who do you think may be better able to resist the pleadings of a desperate beneficiary? A close relative or a corporate entity?
Furthermore, the trust can specify the precise circumstances under which money will be paid to its beneficiary, or it can specify that the trustee will retain complete discretion in the disbursement of funds.
Trusts can also include incentives, such as requiring drug or alcohol testing before the funds are paid out, or perhaps, that a lump-sum payment be made only upon graduation from college.
To ensure that an heir is committed to change, lump-sum amounts can be paid out after prescribed periods of time, e.g., five years of sobriety. To encourage your heir to seek gainful employment, the trust might pay out a dollar for every dollar in wages. Alternatively, the trust can be written whereby payments are made directly to service providers, like a landlord or utility company.
Trusts can be flexible in their design, but before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.
1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.2. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2021 FMG Suite.
Inheriting wealth can be a burden and a blessing. Even if you have an inclination that a family member may remember you in their last will and testament, there are many facets to the process of inheritance that you may not have considered. Here are some things you may want to keep in mind if it comes to pass.
Keep in mind this article is for informational purposes only and is not a replacement for real-life advice, so consider speaking with a legal or tax professional before making any decisions with an inheritance.
Take your time. If someone cared about you enough to leave you an inheritance, then you may need time to grieve and cope with their loss. This is important, and many of the more major decisions about your inheritance can likely wait. You may be able to make more informed decisions once some time has passed.
Don’t go it alone. There are so many laws, choices, and potential pitfalls – the knowledge an experienced professional can provide on this subject may prove critical.
Think of your own family. When an inheritance is received, it may alter the course of your own financial strategy. Be sure to take that into consideration.
The taxman may visit. If you’ve inherited an IRA, it is important to consider the tax implications. Under the SECURE Act, distributions to non-spouse beneficiaries are generally required to be distributed by the end of the 10th calendar year following the year of the account owner’s death.
It’s also important to highlight that the new rule does not require the non-spouse beneficiary to take withdrawals during the 10-year period. But all the money must be withdrawn by the end of the 10th calendar year following the inheritance. A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and children of the IRA owner who have not reached the age of majority may have other minimum distribution requirements.
Stay informed. The estate laws have seen many changes over the years, so what you thought you knew about them may no longer be correct.
Remember to do what’s appropriate for your situation. While it’s natural for emotion to play a part and you may wish to leave your inheritance as it is out of respect for your relative, what happens if the inheritance isn’t appropriate for your financial situation? A financial professional can help determine if the inheritance fits with your overall goals, time horizon, and risk tolerance.
Investment firms have a client service feature that may be a benefit to certain investors. They will ask you whether you would like to provide the name and information of a trusted contact.1
You do not have to supply this information, but it may offer some advantages. The request is made with your best interest in mind – and to lower the risk of someone attempting to make financial decisions on your behalf.1
Why is setting up a trusted contact so important? While no one wants to think ill of someone they know and love, the reality is that seniors have lost an average of $50,200 each time a “known person” commits elder fraud exploitation. And according to the IRS, seniors are more likely to be victims of financial scams than any other age group.2,3
The trusted contact request is a response to this reality. The Financial Industry Regulatory Authority (FINRA) now requires that investment firms make reasonable efforts to acquire the name and contact info of a person you trust. This person is someone that investment firms can contact if they suspect the investor is making an “unusual financial decision” or appears to be suffering a notable cognitive decline.4
Investment firms may put a hold on disbursements of cash or securities from accounts if they suspect the withdrawals or transactions may involve financial exploitation. In such circumstances, they are asked to get in touch with the investor, the trusted contact, and other agencies, if necessary.4
Who should your trusted contact be? At first thought, the answer seems obvious: the person who you trust the most. Yes, that individual may be one of the best choices – but keep some factors in mind.
Ideally, your trusted contact is financially savvy, or at the very least, has some basic financial knowledge. You may trust your spouse, your sibling, or one of your children more than you trust anyone else, but how much does that person know about investing and financial matters?
You should have a high level of confidence that your trusted contact will behave ethically and respect your privacy. This person may be given confidential information about your investments.
It is encouraged that your family members know who your designated trusted contact is. That way, any family member who might be tempted to take advantage of you knows another family member is looking out with your best interest in mind, which may be an effective deterrent to elder financial abuse. It should be noted that the trusted contact may, optionally, be an attorney, a financial professional, or a CPA.4
Your trusted contact is your ally. If you are being exploited financially or could be at risk of such exploitation, that person will be alerted and called to action.
As the old saying goes, money never builds character, it only reveals it. The character of your trusted contact should not waver upon assuming this responsibility.