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What is Step-Up Basis? And What Does It Mean to You?

What is Step-Up Basis? And What Does It Mean to You?

Do you imagine leaving a significant amount of wealth to your heirs? What about receiving a large inheritance? If either of these circumstances is in your future, you’ll want to understand the step-up in basis and how it could affect what you’re leaving as your legacy or what you’ll receive as the inheritor.

 

 

How the Step-Up in Basis Works

 

The “step-up in basis” is a tax provision that makes it possible for families to pass on certain types of assets at current market values instead of their original cost basis. Why is this important? For tax purposes, allowing heirs to avoid potentially significant capital gains taxes.

 

You see, generally, when appreciated assets are sold, it triggers a capital gains tax. Let’s take a piece of family property as a prime example as this is something we see left to heirs with our clients quite frequently. 

 

If a family that has owned a piece of property for many years sells it, the gain in value since its purchase date is subject to capital gains taxes. However, under the step-up basis provision, if a parent bequeaths the property to their children, the property’s cost basis, or original purchase price, is reset to the property’s fair market value at the time of their death. If the heirs immediately sell the inherited property at the fair market value, they will owe zero capital gains taxes.  

 

Now let’s put some numbers to it. If the owners of a bequeathed property paid $250,000 for it 25 years ago, and its current fair market value is $500,000 at the time of their death, the heirs inherit the property at its stepped-up cost basis of $500,000. That’s $250,000 that the inheritors won’t owe capital gains on!

 

Keep in mind, though, while they aren’t responsible for the $250,000 of capital gains in the property at the time of their parent’s death, they are responsible for taxes on gains on the property going forward. If they sell the property later for $800,000, they will be required to pay taxes on the $300,000 capital gain. 

 

Assets transferred to family members before the owner’s death aren’t eligible for a step-up basis, putting recipients who sell the assets in the position of paying capital gains taxes based on the owner’s original cost basis. 

 

Why Step-Up in Basis is Important

 

For families looking to leave a legacy and for continuity of their wealth, the step-up basis is critical because it prevents heirs from selling off other assets to pay the higher capital gains tax—plus it means the heirs can inherit more due to a lessened tax liability.

 

The step-up in basis is especially vital for family businesses such as farms that lack the cash on hand to cover the tax. If they are hit with a significant tax bill, many would be forced to downsize the business or sell it completely. 

 

However, not all assets are treated the same when transferred upon the owner’s death. In planning to maximize your estate for your heirs, it is vital to understand how the IRS treats various types of assets. 

 

Assets Eligible for a Step-Up in Basis

 

Most assets are eligible for a step-up in basis if they are transferred to heirs upon the owner’s death, including:

 

  • Family residence
  • Investment properties, including apartment, commercial, retail, and medical buildings
  • Securities such as stocks, bonds, ETFs, and mutual funds
  • Businesses and equipment
  • Art, antiques, and other collectibles
  • Assets held in a living trust

 

Asset not Eligible for a Step-Up in Basis

 

Generally, tax-favored investment vehicles such as qualified retirement accounts and annuities are not eligible for a step-up primarily because the owners have already benefited from significant tax breaks during their lifetimes. That means beneficiaries are responsible for capital gains on contributions made to the plan. 

 

Non-eligible assets include:

 

  • Qualified retirement accounts, including IRAs, 401k, 457, and 403b plans
  • Defined benefit plans
  • Money market accounts
  • Certificates of deposit
  • Assets held in irrevocable trusts

 

The Bottom Line

 

The step-up basis is a legal tax loophole that allows heirs to receive assets upon the owner’s death at current market values, thus freeing them of capital gains taxes based on the original cost basis. It’s a significant estate planning tool families we help our clients use to maximize the value of their estate for their heirs. Of course, it is essential to work with a qualified estate or financial advisor to understand how the step-up in basis affects your estate plan and to ensure your assets receive the most favorable tax treatment.  

 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

5 Tips to Stay Calm During a Market Downturn

5 Tips to Stay Calm During a Market Downturn

Is the economy slowing down? How will rising interest rates impact my finances? Is a recession around the corner? Scroll through any newsfeed and you’ll hear these unsettling questions. And while the headlines can be alarming, we remind our clients of the benefits of staying calm, cool, and collected—keeping their eyes off the headlines and focused on the end goals we have set up for them. 

 

Stay Invested

 

Some of the costliest mistakes investors make come down to one thing and one thing only…their emotions! If you have a sound investment strategy, there’s no reason to “jump ship” in a downturn. This is called panic selling. Panic-selling is when you sell your assets when values are down to try and avoid further loss, with the intention of “jumping back in” when the market has recovered. The thing is, though, that we never know when or where the bottom is, nor do we know when it will recover.

 

Remember Big Dips Can Precede Large Surges

 

And, because the market has some of its best days right after some of its worst, most investors miss out on the recovery and end up re-buying similar assets at a higher price—plus the liability on tax events they may have triggered by liquidating their assets. Just consider those who sold at the bottom of the March 2020 COVID-induced drop and missed out on the miraculous, V-shaped recovery we saw over the next two years.  If fear prompts you to sell, you could miss the upside.

 

Take Your Eyes (and Ears) Off the Market

 

Where focus goes, energy flows. The more you buy into the headlines, the more emotionally affected you may be by them. But no matter how diligently we watch the headlines, none of us can control what will happen with the stock market. So, if you feel the noise in the media tempting you to make a financial move you might regret, just tune out the noise. And of course, connect with your financial advisor to discuss your concerns. This is often all that is needed to restore a sense of peace and confidence in the financial plan.

 

Focus on What You Can Control

 

There are some aspects of our financial lives that we can control with our actions, and others we cannot. As discussed earlier, we can’t predict market volatility – and we certainly can’t control it – but we can understand that its disruptions are temporary and won’t result in permanent loss. As long as your advisor is re-balancing and speaking with you about how they are handling your portfolio during the downturn, it’s unlikely there is much needed from you—except, of course, your trust in the process, the plan, and the long-term goals your advisor set up for you.

 

Lean on the Help of Your Financial Advisor

 

Your financial advisor is here to help you with more than just investment management, tax planning, and retirement planning. We are here to help you stay even-keeled and level-headed when major and minor events threaten your cool. Of course, we update, re-balance, and diversify your portfolio ongoing to make sure you stay on track to reach your goals, but if a market downturn has you worried, we’d be happy to go over your financial plans with you at any time.

 

Remember, the market moves up and down daily. Market downturns (and upswings) are par for the investing course. We’re here to help you make the most of each situation to maximize your returns long-term.

 

 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

How Market Cycles Can Impact Retirement

How Market Cycles Can Impact Retirement

Markets go up. Markets go down. But no one can predict when, how, why, or for how long. Ups and downs are par for the investing course, but market cycles can have a greater impact on those nearing or in retirement than those in their accumulation years. That’s because in retirement you simply have less time and fewer opportunities to rebuild your savings should the market take a turn for the worst.

 

So, in order to understand how market cycles can impact your retirement (and what you can do about it) let’s look at some facts.

 

 

Understanding the Impact of Market Cycles

 

The most noticeable impact market cycles can have on your retirement is in regard to income distribution. When you rely on your investments to generate income, a less-than-favorable market cycle can dictate how long your money will last. That’s why it’s imperative to determine the optimal spend down of your assets, which can be complex and based on many factors (both known and unknown).

 

Over the years, many financial advisors have been applying the “4 percent rule,” developed several decades ago by financial planner William Bengen. Bengen modeled various asset allocations and spend-down rates over a 30-year period to see how each would have fared. He found that, between 1926 and 1976, an asset allocation mix of 50 percent stocks and 50 percent bonds enabled retirees to safely draw down four percent of their assets annually without running out of money. 

 

Following that rule in the 1980s and 1990s made sense because bonds and stocks experienced primarily positive returns. It didn’t work quite as well in the 2000s with a largely stagnated stock market, forcing retirees to deplete their assets more quickly.

 

What complicates this rule of thumb is market volatility, which introduces a greater risk to the portfolio. When retirees are drawing down assets during a declining market period, there is a higher probability their assets will not last as long as they’d hoped. The only remedy then seems to be to reduce the spend down rate, live a diminished lifestyle, or risk depleting their assets too soon. And of course, no one wants to run out of money.

 

There is an even greater risk when the market declines at the beginning of retirement. A steep market decline in the first few years before or after retirement, even if followed by a sustained market increase, can severely impact future income. This risk is referred to as a “sequence of returns” or sequence risk and is one that very few DIY investors are privy to. And if they are aware of the risk, they tend not to know how to account for it in their financial plans.

 

The Greatest Risk Retirees Face: Sequence of Returns Risk

 

When it comes to retirement drawdown and market cycles, timing is everything. That’s because a sequence of returns risk stems from the timing of market returns and their impact on your portfolio when you begin to draw down your assets.

 

While it is fair to assume that the market will generate an average rate of return over time, that doesn’t account for the timing of those returns. Your portfolio can average eight percent a year over twenty years, but if the first three to five years consist of negative returns, it could be too much to overcome even if the next fifteen years produced positive returns. 

 

Why? Because loss and gain are not inversely proportional. If stocks in your portfolio decline in value, you need to sell more shares to meet your income needs. That reduces the number of shares left to grow inside your portfolio. During a prolonged market decline, that accelerated depletion of shares could make it difficult for your portfolio value to recover as the market recovers. 

 

Imagine your portfolio like an apple tree. Each year you need to take 40 apples from the tree to survive. Based on the tree’s history, this is a safe rate at which the tree will at least replenish if not surpass restoring those 40 apples. But, if when you begin taking those 40 apples out each year, the tree starts to produce fewer apples—you run the risk of using up all your apples before the tree has a chance to grow more.

 

The Risk (or Reward) is Greatest at the Beginning of Retirement

 

Conversely, drawing down your assets during an advancing market could provide the boost needed to carry your portfolio through future market declines or allow you to live an enhanced lifestyle. That also means if your portfolio experiences negative returns in later years, it will probably have a minimal negative impact. 

 

Consider the following chart showing two portfolios starting with $500,000. Both are drawing down assets at a rate of $25,000 per year adjusted for 3% inflation. Portfolio 1 experiences negative returns in the first three years, followed by multiple cycles of positive and negative years. Portfolio 2 starts out with four years of double-digit returns followed by a typical market pattern of positive and negative returns with three years of negative returns at the end. 

 

 

 

Portfolio 1

 

 

Portfolio 2

 

 

Age

Return

Withdrawal

Value

Return

Withdrawal

Value

65

 

 

$500,000

 

$500,000

 

66

(-23.1%)

$25,000

$365,250

22.7%

$25,000

$582,825

67

(-6.1%)

$25,750

$318,704

19.6%

$25,750

$666,456

68

(-0.3%)

$26,523

$291,397

18.0%

$26,523

$755,377

69

24.5%

$27,318

$328,694

24.5%

$27,318

$906,202

70

18.0%

$28,138

$354,777

(-0.3%)

$28,138

$875,706

71

19.6%

$28,982

$389,764

(-6.1%)

$28,982

$794,858

72

22.7%

$29,851

$441,613

(-23.1%)

$29,851

$588,250

80

(-23.1%)

$37,815

$181,631

22.7%

$37,815

$790,464

81

(-6.1%)

$38,949

$133,941

19.6%

$38,949

$899,073

82

(-0.3%)

$40,118

$93,572

18.0%

$40,118

$1,013,911

83

24.5%

$41,321

$65,035

24.5%

$41,321

$1,210,566

84

18.0%

$42,561

$26,529

(-0.3%)

$42,561

$1,164,868

85

19.6%

$26,529

$0

(-6.1%)

$43,838

$1,052,361

86

22.7%

$0

$0

(-23.1%)

$45,153

$774,491

94

(-23.1%)

$0

$0

22.7%

$57,198

$976,010

95

(-6.1%)

$0

$0

19.6%

$58,914

$1,097,167

96

(-0.3%)

$0

$0

18.0%

$60,682

$1,223,467

97

24.5%

$0

$0

24.5%

$62,502

$1,445,033

98

18.0%

$0

$0

24.5%

$64,377

$1,376,948

99

19.6%

$0

$0

(-0.3%)

$66,308

$1,230,356

100

22.7%

$0

$0

(-6.1%)

$68,298

$893,562

Avg

6.5%

$654,451

$0

(-23.1%)

$1,511,552

$893,562

 

 

For this analysis, the same rates of returns are used in both portfolios, except their sequence is reversed. So, both portfolios generated the same 6.5% average rate of return, yet the outcomes were vastly different due to the sequence of returns. 

 

Key Takeaway

 

While you can’t predict the stock market’s direction, much less the sequence of returns as you enter retirement, you can prepare a diversified portfolio that is designed to handle such possibilities. We help our clients mitigate this risk and provide them with peace of mind that the retirement income plan we have built for them will be able to mitigate the sequence of return risk and boost their overall lifetime income sufficiency.

 

Creating Your Financial Strategy

At Platt Wealth Management, we know that life is about so much more than accumulated wealth and that real, impactful financial planning starts with what you want most out of life. That’s why our mission is to provide the financial expertise our clients need to think through and achieve the dreams they never thought possible. If this sounds like the financial advisory relationship you’re looking for, we encourage you to reach out and schedule your complimentary appointment with our team today. Or you can call the office directly @ 619-255-9554. We look forward to meeting you.

 

 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Is the 60/40 Portfolio Allocation too Risky Now?

Is the 60/40 Portfolio Allocation too Risky Now?

For over seven decades, the 60/40 portfolio allocation has been the stalwart strategy of retirement planners with a high degree of success until recently. More recently, the tried and true portfolio mix has come under pressure, mounting uncharacteristic losses that may indicate it has lost its luster. What has changed for the 60/40 allocation, and has it become too risky?

 

Background on the 60/40 Allocation

 

The 60/40 portfolio has been around for more than 70 years, but it was popularized by Vanguard founder and investing great John Bogle. The research and data available at the time showed it to be an optimal allocation using stocks to drive returns and bonds to provide ballast during volatile markets. It was considered a balanced portfolio that could achieve growth while minimizing volatility and downside risk. A 60/40 portfolio regularly outperformed all stock or all bond portfolios.

 

It worked because, during most of that period, stocks and bonds had a low correlation with one another. When stocks were performing well, bonds were underperforming, and vice versa. But in 2021, that equilibrium suddenly changed. In the final quarter of 2021 through the current month, stocks and bonds became highly correlated, with both performing poorly. Instead of a portfolio where bonds are tempering the slumping returns of stocks, they have now become an additional drag on it. That’s not what investors sign up for with a 60/40 portfolio allocation.

 

It’s important to understand that the 60/40 rule was established long ago under different economic and market conditions. It performed exceptionally well over the last several decades because it was a time of historic gains in the bond market. That’s because interest rates had been in a sustained decline since the 1980s. Not anymore.

 

That was Then. This is Now

 

With the recent surge in inflation, the likes we haven’t seen in more than 40 years, the conditions for bonds have changed to the detriment of 60/40. To cool inflation, interest rates must rise. When interest rates rise, bond prices fall, which they have been doing for most of this year. Interest rates will continue to climb depending on how long and high inflation will run, making it difficult for bonds to fulfill their role as a defensive hedge.

 

If you believe the experts, investors in a 60/40 portfolio should downsize their return expectations over the next decade. Vanguard forecasts a relatively low median annual return of less than 4% through 2031. That’s well below the 7% annual return target of a 60/40 portfolio, primarily due to declining bond prices. 

 

Is it Time to Consider Total Return Alternatives?

 

If high inflation persists, investors now have to worry about the possibility of negative returns on their investments. For some investors, especially those with longer time horizons, it may be time to change the allocation rule with less emphasis on bonds and more emphasis on total returns. Several bond alternatives provide diversification while enhancing total return opportunities.

 

Utility stocks: Utility stocks act similarly to bonds because they offer high yields and relative safety. Some of the better utility stocks have a record of steady earnings and dividend growth. While utility stock prices can be sensitive to rising interest rates like bonds, they offer higher total return potential. 

 

High-quality dividend-paying stocks: High-quality companies with a long history of paying annual dividends and increasing them over time are a reliable source of income. They also tend to be less volatile than the rest of the stock market, making them a great diversifier. The dividend acts as a cushion against declining share prices. 

 

Real estate investment trusts (REITs): REITs are professionally managed real estate portfolios that hold up well in an inflationary environment. Many are required to pay out up to 90 percent of their earnings as dividends, making them a reliable income source. 

 

Though it may not be entirely over for the venerable 60/40 portfolio allocation, it may be a while before it recaptures its magic, which calls for some rule adjustments in the meantime. The adjustments don’t have to be radical—perhaps moving from a 60/40 stock and bond allocation to a 60/20/20 stock, bond, utility stock, high-quality dividend stock allocation, or some combination of all the above. 

 

However, any changes to a long-term investment strategy should always be made in consultation with an investment advisor with the expertise and tools to help you assess your circumstances and create an allocation consistent with your investment objectives, time horizon, and risk profile.

 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand-alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

How Rising Interest Rates Could Impact Your Finances

How Rising Interest Rates Could Impact Your Finances

As expected, the Federal Reserve is holding firm to its policy of hiking short-term rates in an effort to cool inflationary pressures. Generally, these small, incremental rate increases don’t immediately impact consumers. The fed rate is the rate the Treasury charges banks for the use of money overnight. When the Fed raises its short-term rate, the banks will increase the rate they charge borrowers, so consumers may experience a slight uptick in borrowing costs.

 

The more significant impact on consumers comes from an increase in long-term rates (Treasury bonds), which have also seen an uptick this year, impacting mortgage rates, variable loan rates, credit card interest, savings account rates, and certificates of deposits.

 

Here are the ways higher interest rates can impact your finances and some steps to take to mitigate their effect.

 

 

Higher Mortgage Rates

 

After hovering near historic lows for several years, mortgage rates jumped past 5% for the first time in more than a decade. With Treasury bond yields expected to inch higher, mortgage rates won’t be far behind.

 

Rising interest rates won’t impact you if you currently hold a fixed-rate mortgage. However, if you have plans to refinance your loan, now would be the time to do it because there’s no predicting how high rates could climb.

 

If you hold an adjustable-rate mortgage, your interest costs will increase, so now may be your best opportunity to lock in a reasonable, fixed rate.

 

Higher Consumer Debt Costs

 

Credit cards and other types of consumer loans also carry variable rates, which can be expected to increase with rising interest rates. Keep in mind, variable rates on consumer loans tend to adjust once per year, while credit card rates can change at any time.

 

Your best bet is often to pay down high interest, variable debt as quickly as possible to avoid swift changes to your payment. Some lenders offer personal loans with fixed rates for loan consolidation as an option to explore. You could also look for 0% balance transfer opportunities, though that would only be a temporary solution.

 

Good News for Savings Deposits

 

Savings accounts are already seeing yield increases. However, unlike rates on consumer debt, which lenders are quick to raise when interest rates rise, rate hikes on savings accounts tend to be smaller and less significant. Still, accounts that were recently yielding as low as 0.025% have jumped to as high as 1.0%. While it’s still relatively low, it’s an improvement. If interest rates continue to increase, you can expect yields on your savings to follow suit.

 

The Impact of Rising Rates on Investments

 

Bonds

 

Rising interest rates affect different types of investments in different ways. For example, bonds are almost always negatively impacted by rising interest rates. That’s because rising rates force bond yields up, which decrease bond prices. However, if you hold a bond to maturity, you will receive the entire value when you redeem it. If you sell bonds in this environment, you will likely receive less than their par value. General rule of thumb: When interest rates decrease, bond prices should increase again.

 

Stocks

 

The impact of rising interest rates on stocks can vary depending on the industry or market sector. Stocks of companies with a lot of debt don’t perform as well because they will have higher borrowing costs. Because interest rates are increasing as a result of higher inflation, the bottom line of some companies suffers because of the higher cost of producing or selling goods and services. However, well-established, well-managed companies with big brands, dominant market positions, and low or no debt can perform well in a high-interest and inflationary environment.

 

Diversification is Key

 

As always, the key to successful investing in any interest rate environment is to ensure you are well-diversified with a mix of different asset classes. Because it’s difficult to know which asset class will outperform another at any given time, owning assets with low correlation to one another helps to minimize volatility. For example, historically, stocks and bonds have a low correlation, so it is good to have a mixture of both in your portfolio.

 

Time to Reassess Your Personal Finances

 

Although many people have never experienced it, rising interest rates are a normal part of the economic cycle. For more than three decades, borrowers have benefited from declining rates (not so much for savers). Now the cycle is turning to where savers will benefit over borrowers.

 

Keep in mind that economic cycles can last for years or even decades, so it is essential to maintain some flexibility so that you can make adjustments to your finances that can mitigate adverse effects while capitalizing on positive ones.

 

At Platt Wealth Management, we understand that the rising rate environment is new for many younger investors and may bring up some (not so fond) memories for our older ones. But, rising rates aren’t all bad and simply need to be accounted for in your financial planning.

 

As always, we are here to answer any questions or address any concerns you might have about this rising rate environment. Our goal is to support you through these ebbs and flows in the economic cycle so you stay honed in on what is most important to you on your financial journey. 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Protect Your Inheritance. Enhance Your Life.

Protect Your Inheritance. Enhance Your Life.

Whether it is expected or unforeseen, receiving an inheritance can be life-changing. Regrettably, it’s not always in a good way. That’s because the reality is that many folks struggle to preserve what they’ve inherited in such a way that enhances their life over both the near and long term.

 

In fact, the track record for Americans is pretty abysmal. Only two-thirds manage to increase their wealth after receiving an inheritance, and nearly 90% of families manage to waste it entirely when it passes to the next generation. 

 

Much of this can be attributed to two factors: (1) the heirs’ unwillingness or inability to act responsibly and/or (2) a lack of true understanding about what it means to be a steward of the family’s legacy. The latter tends to happen when family members lack a shared vision and purpose for their legacies. But almost always, it really comes down to poor decision-making and money mismanagement. 

 

Inheriting money should be a blessing, not a curse. But it takes the right perspective and the willingness to manage it with a clear purpose to get right. An inheritance that is honored and preserved provides the potential to change you and your family’s financial trajectory (and that of your heirs, as well). 

 

With this in mind, we’ve compiled a list of five things you can do to protect your inheritance and enhance your life so your family’s legacy is put to purposeful use.

 

 

1) Take a Step Back. Pause. Reflect.

 

There’s no rush in deciding what to do with your inheritance. It will be perfectly safe sitting in a zero-risk money market account while you take the time to evaluate your next steps thoroughly. While you might be tempted to make some moves right away, we encourage you to wait until you’ve consulted with your advisory team before you start dispersing the funds.

 

Primarily, this is because major money moves should never be made in isolation, but in the context of your overall financial picture. You need to see how the implications of your decisions could or will affect the other financial areas of your life. There may be better options for the allocation of your funds you aren’t aware of, or tax implications for your decisions that could come back and cost you. Making strategic decisions will be imperative in preserving and maximizing what you’ve inherited.

 

 

2) Build Your Dream Advisory Team.

 

Managing personal finances can be complex, and receiving a large sum all at once can magnify the complexities and implications of your decisions, especially regarding taxes and the estate.

 

Not only will you need an investment strategy based on your family’s goals, priorities, and risk profile., you’ll also need to consider the increased risk exposure you could have and how to protect against it. All of these considerations, and more, need to be integrated into a comprehensive financial plan that will optimize the value of your legacy. 

 

To build your dream financial advisory team, you’ll need to enlist the help of the following professionals: a financial advisor, a tax professional (preferably a CPA), and an estate attorney. Your financial advisor, or team of advisors, can then guide the other members of the team to make the planning and tax decisions that are best for you and your circumstances.

 

 

3) Clearly Define Your Life Ambitions.

 

Getting clear on what you’d like your life to look life is critical before you start spending. Plus, this is the fun part. You get to dream big and decide how you’ll align your resources with what matters to you most. Maybe it’s retiring early, fully funding your children’s’ college funds, or even investing in real estate. Have you always wanted to start a business? Travel more often. Buy a vacation home. Perhaps be able to work remotely doing something you’re passionate about. The way to get there is with the right planning performed up front.

 

Plus, we have found that the people with no clear vision or purpose for how they want to use their money tend to waste it on the “pursuit of more,” which ultimately brings no lasting fulfillment and leads to a lot of personal and financial disappointment. But people who set clearly defined goals that align with the purpose they see in their life are able to make smarter decisions about their money. They have clarity and conviction about how they want things to turn out, and put the plans in place to get them there.

 

At the end of the day, clarity on your big picture helps to streamline your financial plans and investment decisions. Any decision, strategy, or investment option that doesn’t get you closer to your goal should be eliminated.  

 

 

4) Addressing Immediate Priorities.

 

We know you are likely anxious to cross some financial to-dos off your list. Depending on your circumstances, there may be some things you can do right now to enhance your financial position while checking off some financial planning boxes. Remember, any financial decision you make should be made in consultation with your advisory team based on your long-term goals. So, if you are unsure, always err on the side of caution and wait until you have sought the appropriate counsel.

 

  • Pay off Smaller, High-Interest Debts

 

If you have the capacity to pay off smaller, high-interest consumer debts that will improve your cash flow, it may make sense to handle these sooner rather than later. Student loans would be the next in line of priorities, but depending on the amount, you may want to consult with your financial advisor before selling equity positions to reconcile these debts. You need to weigh the relative merits of your desired outcome with the realities of the decision to see what makes the most sense for your long-term financial security.

 

  • Bolster Your Emergency Fund

 

Increase your emergency fund to make sure it can be used for unexpected expenses, such as major medical bills, home or car repairs, or to cover living expenses for up to six months if you lose your income to a job loss or disability. 

 

5) Bigger Picture Goals to Consider

 

  • Funding Your Children’s College Education

 

If the funds are available, this would be an essential box to check off your financial plan. It can be far less expensive to pre-fund your children’s education while they’re young, and if you can do it with a lump sum investment, you can set it and forget it. Your financial planner can help you determine how much to invest now to cover educational expenses and the best vehicle to use. 

 

  • Funding Your Retirement

 

Depending on how large your inheritance is, if you have enough to pre-fund your retirement, it would be another critical box to check. Allocating a portion of your assets to secure your retirement will give you the confidence to freely allocate your other assets to pursue other goals. Again, your financial planner can help you calculate your income needs in retirement and guide you in developing an appropriate investment strategy. 

 

 

6) Honor the Legacy 

 

To honor the legacy bequeathed to you, you must become its steward, ensuring that it will benefit both you and future generations. Your success in accomplishing that will rely primarily on the decisions you make and how well you prepare the next generation for their eventual job as stewards after your passing.

 

Work with your estate attorney to develop a plan designed to preserve your estate and maximize it for your heirs. Include your children in any discussions having to do with your family’s vision and purpose for the legacy, as well as the values and attitudes about money you want to instill in your children. 

Most people who bequeath a large sum of money want to know that it will benefit future generations. After all, that’s what leaving a legacy is all about.

 

Creating Your Financial Strategy

At Platt Wealth Management, we know that life is about so much more than accumulated wealth and that real, impactful financial planning starts with what you want most out of life. That’s why our mission is to provide the financial expertise our clients need to think through and achieve the dreams they never thought possible. If this sounds like the financial advisory relationship you’re looking for, we encourage you to reach out and schedule your complimentary appointment with our team today. Or you can call the office directly @ 619-255-9554. We look forward to meeting you.

 

 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

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