Be Smart about a Financial Windfall or Inheritance

Windfalls can result from fortunate events, like lottery winning, and unfortunate events, like a legal settlement. Whatever the triggering event, a big injection of cash can certainly be a life-changing event in someone?s life.

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Estate planning is a critical part of the retirement planning process. As we kick off the new year, this is a perfect time to ensure that your plan is up to date.
Things change over time. That includes our lives, our family, and even the laws that apply to estates. This means the wills, trusts, and other estate documents that protect our families and secure our legacies may need to change, too.
With that in mind, we’re thrilled to have Keith McManus, attorney at McManus Estate Planning, back on the podcast. In our conversation, we discussed the downside of not reviewing and updating your estate plan, different ways to protect your biggest asset such as the family home, and the pros and cons of life estates and much more.
In this podcast discussion, you’ll learn: 
  • Reasons why a “set it and forget it” strategy can put your estate at risk.
  • How to take advantage of incredible opportunities before the Tax Cuts and Jobs Act sunsets in 2025.
  • Why you may want to prepare estate plans to protect young adult children, even if they haven’t accumulated much wealth yet.
  • What it means to create a life estate–and the potential risks and benefits of this approach to retirement.
  • Why there’s no such thing as a cure-all trust–and how this makes estate planning more important than ever.
  • Why you never want to rely on a will as the backbone of your estate plan.

Few would complain about a financial windfall, and often an inheritance will significantly alter one’s financial status.? But many people report feeling feelings of anxiety, guilt and stress about what to do with new-found wealth, and even more importantly, how to not squander the opportunity. Making a plan, says the article ?Handling a financial windfall? from MSN, is the best way to start.? Owning the assets in legal structures like Trusts and business entities [LLCs, corporations, FLPs] will often carry significant better tax positions, increased privacy and legal protections rather than owning assets outright in your personal name and social security number.

Treat yourself. Finding a balance between being cautious about the money and enjoying it is not easy, especially if the volume of assets is significant to you.? One approach is to set aside a certain, fixed percentage of the money for entertainment and fun. Depending on your situation, that might be 1% to 5%.? Be mindful that a financial windfall may not happen again and inheritances are the sum of your loved one’s life of work.

What is the tax liability? Some windfalls come with taxes, and some don?t. Life insurance proceeds are not taxable, but an inherited IRA is. Gambling winnings are definitely taxable, as is income realized from the sale of a home or stocks. If you don?t know what the taxes on your windfall will be, find out before you spend anything.

Time for a team approach. If you don?t already have an estate planning attorney, a CPA or financial advisor, now is the time.? Affluent friends with good business acumen will almost certainly have trusted advisors.? Receipt of an inheritance or financial windfall is not unusual but calls for proper planning.? Likewise, receipt of an inheritance may come with certain conditions that your loved one set for you in their estate planning documents, so carefully review these prior to spending.

Create financial and life goals. You may have choices now that you?ve never had.? For instance:

  • Hiring an estate planning attorney to create Trusts for privacy, tax advantages and legal protections;
  • Buying or upgrading a home in a way that protects your family and children from future creditors;
  • Investing;
  • Buying life insurance;
  • Creating an emergency fund;
  • Paying for education;
  • Paying off debt

Receipt of an inheritance or financial windfall is also the time to have an estate plan created, or if you have an estate plan, this is the time to update your plan. A financial windfall is a big change in your financial situation and may require changes to protect your assets, which can be done through your estate plan.

Enjoy the assets but also be smart about protecting it.

Reference: (July 31, 2020) ?Handling a financial windfall?