A generational wealth transfer has begun and is expected to continue over the next twenty years as baby boomers age and pass along wealth to their heirs. An inheritance from a loved one, whether anticipated or not, can provide financial stability for clients, but an inheritance can also create stress. It is emotional to grapple with the loss of a loved one while simultaneously administering an estate and handling the responsibility that comes with wealth. If you’ve received an inheritance, it is wise to be patient and take your time, and delay making any major lifestyle changes before seeking professional advice.

From a financial planning perspective, one of the first steps with managing an inheritance is to determine what types of assets make up the estate – and identify where those assets are located. Inherited assets often include cash, investments, real estate, IRA’s, 401(k) accounts, and insurance policies. It is not uncommon for clients to inherit assets held at many different banks and custodians, or receive real estate located across multiple states. It typically makes sense to consolidate assets to make your portfolio easier to manage and track.

Developing a Strategy

Once you have a better understanding of what types of assets comprise the estate, it is imperative to develop a strategy to preserve, protect and grow your wealth. One of the best ways to do that is to assemble a team of professionals who will work together to provide you with a holistic and integrated approach, a team that typically consists of a financial advisor, estate attorney, and tax professional.

A financial advisor can work with you to develop a strategy customized to your goals and risk tolerance. Goals might include paying off debt, enjoying a financially secure retirement, renovating a home, giving to charity, or preserving wealth for future generations. An advisor can help assemble a financial plan and reallocate the investment portfolio to an allocation aligned to your goals and time horizon, and help strike a balance between risk and reward, all tailored to your individual risk tolerance. At FBB Capital Partners, we believe in taking a disciplined investment approach and helping clients avoid unnecessary risk. We also help clients to understand the pros and cons of different strategies and how their decisions along the way may or may not help them accomplish their goals.

Assembling Your Team of Professionals

When settling an estate there are often complex tax and legal matters that heirs face. A tax professional can help prepare and file the final tax return for the decedent, file an estate tax return, and file a trust tax return, if applicable. An inheritance is typically taxed at the estate level, not at the individual level (to the beneficiary), and although Federal estate tax rates max out at 40%, the current Federal gift and estate tax exemption is at a historical all-time high, helping many families avoid Federal gift and estate tax altogether. The 2024 Federal gift and estate tax exemption is $13.61 million per individual, and for a married couple the total exemption is $27.22 million. It is important to keep in mind that many states levy their own estate and/or inheritance tax. The historically high Federal gift and estate tax exemption amount will be cut roughly in half when the Tax Cuts and Jobs Act from 2017 sunsets at the end of year 2025. It is uncertain whether Congress will enact new legislation to continue the exemption at current levels, creating challenges for estate planners. For ultra-high net worth clients, there are strategies that can be employed now to take advantage of the gift and estate tax exemption limits as they exist today.

A financial advisor or tax advisor can also provide guidance for taking required minimum distributions (RMD’s) from Inherited IRA’s. The IRS rules surrounding RMD’s from IRA’s are complex, but in general an IRA inherited from a non-spouse must be distributed within ten years from when it is inherited, and those distributions are taxed as ordinary income to the beneficiary. This can produce significant increases in taxable income to the heir, often pushing them into higher tax brackets. In the past non-spouse beneficiaries could ‘stretch’ IRA distributions across their lifetime, but that all changed January 1, 2020, when the SECURE Act came into law, which affected IRA accounts inherited in 2020 and thereafter. Inherited taxable assets are treated differently for tax purposes. In general, inherited taxable assets such as a home or a brokerage account receive a step-up in basis, where the cost basis of the assets is ‘stepped up’ to market value at the time of death, which can provide valuable tax savings when the asset is subsequently sold. For those charitably inclined, a financial advisor working in conjunction with your CPA and estate attorney can determine the most tax-efficient way for you to give to charity. Of course, every situation is unique, and the guidance provided by a tax professional is invaluable.

An attorney specializing in estate planning is another critical part of your team of professionals. Mistakes made with filings can cause complications later; a knowledgeable attorney is well worth the upfront investment to avoid missteps. An attorney can offer guidance as you administer the decedent’s estate – and they can also help to create or update an estate plan of your own. Keep in mind there are state-specific nuances, so it is important to find an attorney that is familiar with your state. If your inheritance came from your spouse, make sure to speak with your advisors about portability. Portability is the concept of transferring a decedent’s unused gift and estate tax exemption to their surviving spouse, i.e. preserve the $27.22 million estate tax exemption for a married couple instead of $13.61 million for an individual. Portability must be elected timely on the decedent’s estate tax return, IRS Form 706 – it is not automatic. An estate attorney can guide you through decisions like these. As the tax landscape continues to evolve, and especially as the Tax Cuts and Jobs Act is set to expire at the end of 2025, it is important to revisit your own estate plan with your professional team.

Take the time to assemble your team of advisors and consult with them before making major decisions about your inheritance. We recommend working with a financial advisor that is a fiduciary, so you can be confident the advice they give you is in your best interest. A trusted team of experienced advisors can provide you with a solid path forward for managing your new wealth.

About the Author
Martha P. Callahan, CPA, CFP®
Martha is a Certified Financial Planner™ practitioner and brings over 17 years of professional experience to FBB through various roles in finance, business development, and accounting. A Certified Public Accountant since 2012, she enjoys working closely with clients to provide comprehensive and customized planning advice to help them achieve their financial and personal goals. Martha previously worked for a registered investment advisor as the Vice President of Operations, where she focused on operations, trading, and compliance. Her multifaceted career also includes work in commercial real estate and retail development in Easton, Maryland where she had the opportunity to work with local small business owners. Martha earned her MBA from Georgetown University’s McDonough School of Business and her Bachelor of Science in Mechanical Engineering from Virginia Tech. Martha works in FBB’s eastern shore office located in Easton. She and her husband Patrick have two boys and reside nearby in Oxford, Maryland where they enjoy spending time on the water.

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