S2 E13: So You’re Inheriting Money… Now What?

You are listening to The Wealth Mindset Show, where Hixon Zuercher Capital Management, a team of finance professionals, portfolio managers, and a life coach come together to tackle complex topics in finance and retirement planning so you don’t have to. From investment strategies and wealth management to tax planning, retirement income, and aligning your money with your values and purpose, The Wealth Mindset Show offers the tools to thrive.

 

Austin Wilson:

All right. Hey, hey, hey, welcome to The Wealth Mindset Show, where our Hixon Zuercher team will have conversations on managing wealth, navigating retirement, and making smart decisions for a secure, meaningful future. I’m Austin Wilson, Director of Investments at Hixon Zuercher Capital Management.

Josh Robb:

And I’m Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management. And today we’re joined by Tony, our CEO and leader of the forum.

Tony Hixon:

Here we are.

Josh Robb:

Oh, yes.

Tony Hixon:

Thanks for having me.

Josh Robb:

And so we are going to be talking today about receiving inheritance, and if you’ve inherited money or may in the future at some point, this may be a good thing to listen to because we’re going to talk about what do I do?

Austin Wilson:

Yeah, there’s a lot of questions that come to mind. So, “Oh, my goodness, what do I actually do with a lump sum of money? Where do I start?” So we’re going to be taking a look at all of the steps that you can take from the first decisions you make, all the way to long-term planning strategies. So if you’re feeling a little anxious that this may or may not happen to you, hopefully you’re in the right place and we can help you out today. So just in general, guys, what are some thoughts on you had a client come to you, they’re like, “Wow, my life just changed, my parent died,” or something like that, “and there’s a chunk of money coming my way.” Where do we start from here? What are your guys’ thoughts as you think from a planning perspective, client comes to you?

 

[1:49] – Should You Account for An Inheritance in Your Retirement Plan?

Tony Hixon:

Yeah, the one story that comes to mind for me, and this is just in general, when there is that expected inheritance, should we as planners count for that in the retirement projection? And our philosophy is no, because ultimately if it’s especially apparent, you don’t want to count on them passing at a certain moment to see if that’s available. They could live a very, very long time. So by no means do we put it in the projection, but it’s always in the back of our client’s minds. And so we have that conversation of, “Hey, let’s plan without it and what a blessing and the extra cherry on top if you do happen to get it.” And that’s happened multiple times where our clients have had their projection done really well and then they’ve been able to be a little bit more philanthropic or purchased that extra item that they had when the inheritance is received.

Josh Robb:

Yeah, it really comes to only if you’re guaranteeing that you’re going to get whatever it is you want in the plan. If it’s just, “Oh, I think sometime in the future I may get something,” you really don’t want to plan for that. But if you say, “You know what? Hey, there’s a trust set up and assets are already set aside,” then maybe you can start allocating. Or, “You know what? There’s this farmland and it’s going to be split this way and here’s when it’s going to happen.”

There’s times where you may be able to, but more often than not, the best case is there’s a long timeframe before you get this inheritance, which means you get a lot of time with whoever that person is. So don’t count it is the first part. Don’t assume your success is dependent on someone else leaving you something because there could be long-term health costs or something that depletes those assets for their benefit and there’s less for the inheritance, which is fine because that’s their money to use, but it may mess up your plan. You don’t want to have that success based on that.

Tony Hixon:

It’s just an odd conversation to have too.

Josh Robb:

It’s weird.

Tony Hixon:

We want you to die so that our retirement is successful. That’s just not something you should count on it.

 

[3:44] – Don’t Rush into Any Big Decisions

Austin Wilson:

However, it can certainly move the needle. It can certainly move the needle. So let’s talk about some tips that people can think about as they’re thinking, “Hey, this may happen or it has happened.” So a handful of tips we’re going to talk about today. First one, don’t rush into any big decisions. So obviously, get a lump sum of money, there’s a lot of emotions going on. There’s a lot of life transition happening. Could be really sad. We lost a loved one that was very close to us. We think it’s probably best to just start with taking a breath and figuring out what to do. So talk about that a little.

Josh Robb:

Yeah, and this is something I spent a lot of time talking about when this is happening is an inheritance means somebody passed away. And so at that point, you’re dealing with a lot of emotion, a lot of planning, funeral, all that stuff. You got assets you got to probably liquidate. There’s a lot going on. And so the first thing is just saying, “Hey, take care of the things you need to take care of. Don’t worry about this inheritance piece on you don’t need to have everything lined up and planned out.” A lot of times there’s the almost a sense of guilt of now I have this money and I’m happy, but I’m also sad because this person passed and how do I deal with both of those emotions together? And so one of your things is just saying, “Hey, don’t do anything big until you have a chance to really wrap your head around the big picture and take a break, take a pause, no big decisions.”

Tony Hixon:

And on the other side of that, sometimes you can suffer from what we call the sudden wealth syndrome. All of a sudden you didn’t have that money and now it’s there and your mind can go to the American consumeristic side of things and purchase things that really just don’t honor the legacy of who the inheritance was from. And so again, Josh, to your point, just taking that pause and avoiding those quick decisions really makes a lot of sense.

Josh Robb:

And there’ll be a lot of people that will possibly show up in your life. And that’s the other piece of it too.

Austin Wilson:

Cousins come out of woodwork.

Josh Robb:

Yeah, and it doesn’t have to be multimillion dollar inheritance. When that happens, there’s just people that show up are that are like, “Hey, maybe I need a little bit of that,” or, “I deserve this or that,” or you just feel that obligation and just don’t feel that pressure that it has to be spread out because there was a reason why that person left the inheritance to you. There was a reason for that decision.

Austin Wilson:

I also think that that’s why you may not want to keep it all out in the public. So maybe you come into this lump sum of the money, this inheritance and who knows how much. Million dollars is not uncommon anymore, and you may just keep that to yourself and maybe make your life look the same way it does, and be a little bit more discreet about that to avoid that happening.

So our advice here is take one, two, three months, some sort of a window where you just go, “Whoo, I need to digest what happened. I got a lot of emotions going on right now. The money’s in a safe place. It’s not under the mattress, it’s not in the backyard, it’s not in Bitcoin. It’s in a bank account, it’s FDIC insurer and you can decide what you want to do with it at some point there.

 

[6:54] – Understanding What Kind of Inheritance You’re Receiving

Austin Wilson:

So tip number two is understanding what kind of inheritance it is. And this is really talking about different asset types because there are different liquidities, there are different tax rules and planning needs that go around these. So guys, talk a little bit about whether that comes as cash, real estate, farmland and different types of investment accounts, what that means when you’re thinking about what to do.

Josh Robb:

So there’s a couple big buckets, one of which is retirement accounts. So if you inherit a retirement account, so 401k, 403(b), IRAs, there are rules depending on what type of person you are, and that doesn’t mean are you young or older.

Austin Wilson:

Good or bad?

Josh Robb:

Yeah, it means are you a spouse? Because there’s certain rules for spouses. Are you a person who’s older or younger than the person you inherited from? Because there’s rules for those ages and how far in age are you from them also matters. And so there’s different tax rules. So it’s hard to get in and tell you exactly what it is, but know that for a lot of people there are a timeframe where you have to make withdrawals out of this account based on which type of person you qualify as. So make sure you talk with an accountant or an advisor or somebody to understand your rules for that.

Then when you have things that are in the taxable bucket, so that would be brokerage accounts, that would be savings, checking accounts, homes, or any kind of asset you inherit, depending on how you inherit it, you could get an adjustment to that basis. A step-up is what they call it. So if you bought a house, let’s say, for $100,000 and it’s now worth $500,000, that $400,000 is gains. If someone were to sell that home just by owning it themselves, gains are taxed. But at death, a lot of times it’s reset to the current value at the day of death. So then the next person restarts that gain clock and they don’t owe taxes on that first part, depending on how you inherited. There’s always those caveats.

But understanding what your rules are, what has happen and what your timeframe is really helps you then plan for the long term. Hard assets, do I want to hold it like it is, house farmland, whatever, or do I want to sell it and do something else with it? Do I own it by myself? Are there multiple people that own it? Do we have to make a decision together? Those are the things you got to talk about.

Austin Wilson:

Tony, talk a little bit about if maybe this inheritance comes in the form of a trust, some of the restrictions and all the legal requirements and how detailed you have to be looking through those documents to know what you can and can’t do.

Tony Hixon:

Yeah, we’ve been in this career long enough to know we’ve seen some pretty complex trusts and how the generation that is passing those assets onto the next generation, they want to guard them. They worked hard for them. They don’t want to set their next generation up for just laziness. They want them to work and be engaged. So oftentimes there are rules and limits as to how much of that trust can be distributed, whether it be a certain age or a certain dollar amount. So ultimately, really engaging with the lawyer, the attorney, your financial advisor, CPA, that’s really the best way to navigate some of those complex trusts.

Austin Wilson:

That’s the triangle, the love triangle that needs to be involved right here. You need to have a lawyer, a CPA, and your financial advisor all on speed dial because there’s a lot of moving parts here.

Tony Hixon:

I’m a little uncomfortable we just talked about a love triangle, but it’s all good.

Austin Wilson:

That’s right. We’re going to take a quick pause in this episode. Before we get back to today’s topic, I want to take a quick moment to share something that could really help you on your retirement journey. At Hixon Zuercher Capital Management, we are all about making sure your financial life aligns with what truly matters to you. That’s why we created the assessment, are you retirement ready, over at hzcapital.com/quiz. It’s a quick and easy quiz that helps you figure out how prepared you are for retirement. It only takes a few minutes and you might discover some great insights into what you need to do before you retire, both in the financial and non-financial aspects. So if you’re curious about how ready you are to embrace this new phase, head on over to the website and check it out. Again, that’s hzcapital.com/quiz. Now let’s jump back into our conversation.

 

[11:04] – Setting Financial Goals & The Bucket Strategy

Austin Wilson:

So that brings us to our next point, which is setting goals really before you even start spending. So taking a step back and saying, “What do I want this money to achieve?” So what are your thoughts on what kind of impact you want to make with this money or how can you make this inheritance meaningful?

Josh Robb:

One of the things I think about, and we talk about this in other podcasts, is the bucket strategy, having short-term, mid-term and long-term goals. Now you could do the same thing with inheritance to say, “Are there some things I want to do now with some of this money? And then do I want set some aside for future goals?” And that’s okay to have different buckets for that. So you may say, “Hey, I got some inheritance. After I had some time to think about it, I want to pay off some debt. I want to use some of this money to free up my cash flow, get my debt situation in a better spot, but I’m also going to take some of it and set it aside for retirement or for me down the road.” So having some different buckets is a great way to say, “Okay, of all this that I got, I’m going to look at some of these as different things along the way.”

Tony Hixon:

And I think it’s important too to be self-focused. Whoever you’re getting this inheritance from likely did want you to have some financial freedom and security, but it’s also good to think through, “Well, what was important to that generation who you’re inheriting it from?” Is there some sort of charitable organization or education fund? Or what legacy would you want to leave on their behalf? Because ultimately, they’re the ones who likely earned it and stewarded it to the point where they’re now passing it on to you. So sure, be self-focused, but also have others oriented mindset as well.

Josh Robb:

And also with that, what did they prioritize? So maybe who you inherited from prioritized experiences. So maybe we’ll do a trip together in memory of them or go to their favorite place and use some of this money as a way of celebrating them. Those are some of the things you can do.

Austin Wilson:

And this is a great opportunity to involve your spouse as you’re planning these goals because you’re not the only one that’s involved in getting this money. So you guys are a team, plan together, what’s important to you all. They probably knew, whoever left you that money, very well for a very long time. So just make sure you’re on the same page there.

Austin Wilson:

 

[13:10] – Purposeful Investing with Your Inheritance

And that leads us to the next point, which is investing that money with a purpose. So really, you know what you want to do with it, how are you going to do that with that money? And you really get about one chance to put this money to work correctly, to do what you need it to do. So talk about how putting this money to work can be done now that you have some goals.

Josh Robb:

Yeah, it comes back to what Tony said was once you know for sure that this is actually happening, that’s a good time to revaluate your retirement plan, your financial picture to say, “Okay, now that there’s a new change, what all has shifted? What do I need to do to make sure I’m either on track still? Or can I readjust my goals and do more or something different?” So definitely just stepping back and saying, “Okay, here’s where I was heading. This is what I was trying to accomplish. Now, the picture has changed. Where am I at? Where am I going?”

Tony Hixon:

I think, too, it’s important to… You can suffer from really two ways. The first way is, well, it wasn’t my money. So it’s like you’re playing with house money and you get very aggressive with it or invest in things that really don’t make prudent sense. And then the other side of that equation is it’s not your money. I don’t want to lose it. So you get so far into preserving it-

Austin Wilson:

Sit on cash.

Tony Hixon:

Sit on cash, that inflation eats away at it and it doesn’t really serve the purpose in which the inheritance was meant to.

Josh Robb:

And always be aware if you get especially a large sum, if you invest it and it continues to grow, that can increase your taxes because although inheriting is not usually a taxable event because the state pays those taxes, once you have those assets, they can start generating tax for you in the future. So understand what that’ll do to your overall tax picture as well.

Austin Wilson:

And of course, depending on how you receive the assets, whether it’s appreciated stock or not and if you get a step-up or not, you can do a lot of amazing charitable things, donor advised funds, QCDs, whatever you want to do over time that can ultimately reduce tax burdens and ultimately help that money go further and your tax rate be less. So I guess as a matter of wrapping up that particular portion, you’re not probably going to be focusing on growing this money like gangbusters forever because it’s money that you weren’t counting on, your plan probably wasn’t counting on. So you want to have a component of capital appreciation, but also a component of long-term growth built in there as well. And that’s how that money’s going to last hopefully a long time.

Josh Robb:

Or if you’re just trying to decide what to do, just keeping it in something safe, like you said. I’ve had so many people say, “Well, let’s just leave it until I decide.” And that’s a investment decision, but it doesn’t have to be your permanent one. You could just use that as a temporary one to then get to your final allocation.

 

[15:49] – Avoiding Common Inheritance Mistakes

Austin Wilson:

And that leads us to our last point, which is avoiding common mistakes because there are a lot of ways people go wrong. They inherit a lot of money here. Some of those things, like Tony mentioned earlier, this is money you weren’t counting on. You can blow it. That’s something people do and-

Josh Robb:

A lot more often than we would like.

Austin Wilson:

… maybe that’s okay if you don’t need it or have any plans for it, but ultimately, having a plan. We talked about being good. So what are some common mistakes we can avoid as we’re planning ahead here?

Tony Hixon:

To your point, Austin, I think I read a stat, Josh, correct me, generational wealth really runs out at generation three. So this whole overspending thing does seem to be an issue. So other than having self-control or an advisor on your side, I’m not quite sure how to prevent that. But just knowing or understanding that that is a tendency to lifestyle creep or have overspending in your plan, you really got to guard against that. It doesn’t seem like that’s very honoring of the inheritance if you just choose to blow it.

Josh Robb:

And a lot of that comes from as they look back on some of that, historically speaking, is that first generation earned it, worked hard for it, so they have appreciation for it. That second generation watched their parents work hard and earn it, so they have an appreciation for the effort to get there. That third generation did not see that effort. They saw their parents reap the benefits of the inheritance, but never the hard work to get there. And that’s where you see then that disappearance of the inheritance along the way. And so you’re right, there’s the sense of educating and passing along the why helps a lot. Trusts help in that they can protect those assets somewhat along the way up to a point.

And then we’ve mentioned it a couple of times, but understanding the intentions of the original person who earned it on what they would like to see you do with it. Sometimes it is the sense of freeing that they wanted me to enjoy this money and I am being so concerned about losing it that I’m not even appreciating what they wanted me to have. It’s not a benefit to me at this point. I’m more stressed about messing it up. So understanding where the mindset was, how that works.

And then the last one is, now that I’ve received inheritance, what does my estate plan look like? Because now I have more assets. Do I create the right estate plan? Do I have the right beneficiaries? Am I titling them correctly? Am I doing everything I need to do that if something happens to me, I would be able to continue on this legacy or am I going to mess it up? We see time and time again that these are things that I got and then they don’t think through to being the same ability to create the next legacy as that they inherited themselves.

Austin Wilson:

I think what this whole discussion comes down to for me is if you don’t do this for a living, this is the chance to bring in the experts, right?

Josh Robb:

That’s right.

Austin Wilson:

Don’t try and do this alone. There’s no reason to do this alone. It’s not that expensive in the grand scheme of things to get financial advice, tax advice and legal advice.

Tony Hixon:

And you need all three.

Josh Robb:

And you need all three.

Tony Hixon:

The love triangle.

Austin Wilson:

Yeah, the love triangle. It’s okay to ask for help. And so that’s my recommendation here is just work with those three professionals, ones that you trust and hopefully this whole thing will be a lot smoother. So Tony, any final thoughts?

Tony Hixon:

Just to follow up to Josh’s point about updating your own estate plan, sometimes when parents do pass, the next generation, like us, we’re older and so now you’ve got spouses and a more complex family to worry about and perhaps the spouse may not be as wise of steward as the child themselves. It just gets more and more complex. So what Josh’s recommendation was is no joke. If you receive a large inheritance, updating your own estate plan is super important, and getting that love triangle involved is the right thing.

Austin Wilson:

That’s right, all three of them.

Tony Hixon:

All three of them.

Austin Wilson:

Well, thank you for listening. Thanks, Tony, for joining Josh and I today. If you found value in our conversation, don’t forget to subscribe to the Wealth Mindset Show on your favorite podcast player so you don’t miss any episodes. It’s out every couple of weeks and we hope you can do that for us.

If you want to see more resources, visit thewealthmindsetshow.com and you can download our free guide, The Eight Timeless Principles of Investing from that, which is a really great resource we can offer you there. If you have any questions about investing with us at Hixon Zuercher Capital Management, feel free to head over to hzcapital.com and check that out. And always know that we’re posting on social media, so check out our Facebook and Instagram and Twitter and all of that to stay educated and stay connected.

Tony Hixon:

It’s not Twitter anymore.

Josh Robb:

It’s X.

Austin Wilson:

I’ll never get used to calling it X. but otherwise, thank you for listening and have a great week.

Josh Robb:

Talk to you later. Bye.

Tony Hixon:

Thanks. Bye.

 

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