How to plan for a potential inheritance

The amount of wealth that millennials and Gen Xers are expected to inherit from their parents and grandparents is almost incomprehensible: According to Cerulli Associates, a Boston-based research and consulting firm, $84.4 trillion in wealth will be transferred from baby boomer households to younger generations between 2021 and 2045.

Inheritances are not only for the wealthy: High-net-worth households are expected to account for less than half of total transfers.

“Because of the amount of wealth,” says Chayce Horton, senior analyst on Cerulli’s wealth management team, “it’s a really unique point in history.” “It’s something we haven’t seen before.”

Because of the size of the inheritance, recipients may be unsure what to do with it or whether to count on the windfall before it arrives.

If you’re unsure whether to bring up the subject of a potential inheritance with your own parents or grandparents, here are some guidelines from financial experts:

Discuss inheritance early on.

“If your parents haven’t brought it up with you, you need to bring it up with them,” Isabel Barrow, director of financial planning at Edelman Financial Engines, an independent financial advisory firm, says. “We know if you don’t talk about it ahead of time, there are going to be problems.” She describes these as “family feuds,” “confusion over what to do with the money,” or “uncertainty about where to find the most recent version of a family member’s will.”

Barrow suggests broaching the subject when the entire family is together, such as during holidays or birthdays, and everyone is in a good mood. “That might be an opportunity for you just to mention, ‘Hey, I’m doing my financial planning and they suggested I talk to you about your plan,'” she said.

According to Mitch Mitchell, products counsel at Trust & Will, an online estate planning company, it can be beneficial to inform your parents that you are attempting to plan for something that will be difficult for you. He suggests something along the lines of, “It would be a gift if you could map this out.”

Be mindful of cultural differences.

According to Leo Chubinishvili, a wealth advisor at Access Wealth in East Hanover, New Jersey, some cultures and generations are less comfortable talking openly about money than others. Respecting those differences can help to avoid unnecessary stress and discomfort. “It depends on the cultural setting of your family and how you were brought up,” he said.

While Chubinishvili believes that all families should talk about money in some capacity, some families may take longer to warm up to the subject or may benefit from the guidance of a financial professional.

Ensure that the money is secure.

Another advantage of discussing a potential inheritance with your parents is that it allows you to offer assistance if they require it. “Every parent should begin disclosing assets and accounts to their children for a variety of reasons, the most important of which is safety and security,” says Walter Russell, CEO of Russell and Associates, an investment firm in New Albany, Ohio.

“As parents get older, they may forget about an account,” Russell says, adding that seniors are also targets for scammers. If you know more about your parents’ finances, you will be able to spot discrepancies and assist them in keeping their money safe.

Make a plan to spend it wisely.

An inheritance, whether $5,000 or $500,000, can open up previously unconsidered possibilities, such as a vacation or dream home. However, financial experts advise prioritizing less exciting financial expenditures such as debt repayment and savings.

“You can start cleaning up your financial house if you’ve paid off debt and build yourself a good emergency fund with six to 24 months of living expenses,” Barrow said. She then suggests considering funding your intermediate and long-term goals for housing, cars, education, and retirement. She also adds that using a portion of an inheritance to honor a loved one’s life in some way, whether it’s a trip or a nice dinner, can be a good way to honor them.

Do not rely on it.

“The market could turn, and the family business could fail.” “You don’t want to base your retirement or your entire financial plan on that inheritance,” says Laurie Smith, a partner at Wiss, a New Jersey accounting and tax firm.

There’s also the chance that your parents will require that money while they’re still alive. “What if, in 10 to 15 years, one of your parents develops dementia and needs to be admitted to a nursing home?” You’re talking about $200,000 or more per year that the parent may need to use. “Alternatively, your parent may choose to leave their money to their favorite charity,” Barrow says.

To put it another way, an inheritance is never guaranteed. That’s why it’s important to talk with your parents about their plans while also ensuring that your long-term goals, such as saving for retirement, don’t rely on a windfall, which may never come.