Investment Strategies for Inheritors with Surplus Wealth: Turning a Windfall into Lasting Financial Security

Inheriting a substantial sum of money is both a blessing and a challenge. While the opportunities can be vast for high-net-worth individuals, the potential pitfalls are equally significant. This kind of wealth transfer often comes with emotional weight, as it is typically linked to the loss of a loved one, making it even more challenging to navigate the complexities involved.

We’ve seen firsthand how thoughtful planning and strategic investment can make all the difference in turning an inheritance into a source of long-term security and success. Before making any major changes to your lifestyle or investment decisions, it is important to take a breath. Spend some time reflecting on your goals and how this influx of wealth may change your life. Then, create a roadmap that outlines these goals from short to long term paired with the associated action items.

Below are a few ideas to consider as you go down that path.

Understand Your Financial Landscape

Tax Implications

The first step in managing an inheritance is understanding the tax implications. Depending on your location and the amount you inherited, you may face inheritance taxes, or greater income taxes from income-producing assets. If you inherited retirement accounts, you will need to navigate a complex set of rules associated with required distributions. It is important to fully understand the tax ramifications associated with the transition of assets so you can proactively plan.

Outstanding Debt

Consider addressing any outstanding debts and be strategic about which debts to pay off. Start with high-interest liabilities like credit card balances or personal loans and work your way down. For lower-interest obligations like a mortgage, weigh the pros and cons of keeping “as is” or cleaning the slate to simplify life.

Review Your Estate Plan and Revise Accordingly

Now is the perfect time to review your current estate documents or consult a lawyer to set up an estate plan. It’s a best practice to revisit your estate plan every few years—or certainly after any major life event. Life does change, and so do your priorities.

You may want to reconsider how much you’re gifting to family, or you might decide to support a charity important to you. In some cases, you may even want to disclaim certain assets before they come into your possession or establish an irrevocable trust to help control future estate taxes.

Each of these considerations can impact your overall financial strategy, so having regular conversations with your planning team is essential to help keep your plan aligned with your current wishes.

Review Your Portfolio

Asset Reallocation

A large inheritance will likely come with a host of stocks, bonds, mutual funds, and exchange-traded funds (ETFs). For assets held in a taxable account, a “step-up in basis” might apply, offering a tax-efficient opportunity to realign these assets with your current portfolio and risk tolerance.

When considering new investments, focus on tax efficiency with different types of securities like ETFs or even direct indexing with individual positions. Mutual funds, for instance, can trigger significant capital gain distributions due to the trading within the fund itself. In contrast, ETFs typically offer a more tax-efficient structure, reducing the potential for taxable distributions. On the fixed-income side, municipal bonds may be an attractive option for those with high income, as they generate tax-exempt interest.

Specific Account Funding

With surplus cash, take the opportunity to audit your investments by account type. Diversifying your investments across pre-tax, post-tax, and tax-free accounts can provide flexibility during the withdrawal phase of life and help make the most of more tax-advantaged account types.

Evaluate Life Insurance Needs

If you have any life insurance policies in force, it is worth your time to take a closer look. The original needs for purchasing coverage—such as paying off debts, replacing lost income, or funding children’s education—may no longer apply in the same way.

With additional resources added to the situation, you might find that coverage is more than needed or that it could be repurposed in a different matter for estate planning or gifting strategies.

Ongoing Management and Review

Inheriting a large sum of assets is not a one-time action from a management perspective. Ensuring that your newfound wealth continues to serve your long-term goals requires ongoing attention and thoughtful strategy. For some, the process can end up being a chore and leave you feeling uncertain that matters are being handled correctly and efficiently.

This is where a multidisciplinary approach can be invaluable. Working with a coordinated team of professionals—combining expertise in wealth management, tax strategy, and estate planning—can help you optimize your decisions from all angles, providing peace of mind that the gift you received continues to give for many years to come.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor. Past performance is not indicative of future results.