A financial windfall doesn’t free you from thoughtful financial decisions. Here’s how to prudently manage an inheritance, such as a Vanguard inherited IRA, in the event you’re fortunate enough to participate in the “Great Millennial Wealth Transfer.”

Welcome to Financially Well, the finance podcast for Millennials. On this episode, I want to discuss what to do with an inheritance. Most Millennials remain focused on paying off student loans, saving for a down payment, or investing for the long term. But some also have learned that they stand to receive a small financial windfall from a family member in the near future. Welcome to what headlines have referred to as the “Great Millennial Wealth Transfer.”

For example, you may have heard that you’ll soon have a Vanguard inherited IRA in your name. What action should you take when you do? Several well-established financial institutions are taking steps to encourage you to invest for your future with them. And their services may indeed make sense for some Millennials. But most young adults will find that a small financial windfall, in the form of an inheritance, only requires a few essential tasks. And initially, you’re often best off doing very little at all.

The #FinTech Eager to Help with Any Millennial’s New Financial Windfall

Bloomberg reported late last month that “Three of the grandest names in white-shoe wealth have recently opened their digital doors to the averagely affluent.” Authors Ben Schott and Paul Davies then reviewed a recent timeline in which:

• Goldman Sachs expanded Marcus, its personal loan platform. Goldman launched “Marcus Invest, ‘an automated investing platform with managed portfolios of affiliated and unaffiliated ETFs.’” (February 2021)

• JPMorgan Chase acquired Nutmeg, “one of the most successful digital challengers in the British wealth management market.” (June 2021); and

• UBS acquired Wealthfront, ‘an industry-leading, automated wealth management provider serving the next generation of investors.’” (January 2022)

Many Millennials already know names such as Goldman Sachs and JPMorgan Chase. You may have a high-yield savings account at Marcus. Or even a taxable brokerage account at Wealthfront. Regardless, we now have high-end financial institutions – historically, only accessible to the very wealthy – opening their doors a bit wider. They’re increasingly interested in courting Millennials who also need to understand what to do with an inheritance. And the companies’ splashy #FinTech acquisitions and Millennial-friendly branding are designed to encourage Millennials to entrust them with their future investing interests. How should you view their services, especially if you expect to receive a small financial windfall soon?

The Great Millennial Wealth Transfer in Numbers

Think back to only a few years ago. Most of the articles written about Millennials and our finances dwelled on avocado toast, lattes, and student loan debt. But headlines now increasingly focus on different, slightly more flattering numbers. As Bloomberg reported:

“As each day passes, more members of Gens X–Z are reaping the fiscal harvest sowed by the richest-ever generation who, born between 1946 and 1964, are now 58 to 76 years old. According to Morgan Stanley, this represents ‘the largest intergenerational wealth transfer in history, with $30 trillion set to change hands over the next few decades.’”

A 2020 CNBC article highlighted the same dynamic. CNBC wrote, “Over the next decade, millennials are expected to inherit over $68 trillion from their baby boomer parents, according to an Oct. 2019 study from real estate firm Coldwell Banker. If this prediction holds true, Millennials will have five times the wealth they have today by 2030.”

As with the avocado toast headlines, this news may steer Millennials’ thinking in unproductive ways. First, the scale of the Millennial wealth transfer may give many young adults a stressful case of FOMO if they’re not included. Then, as described above, many profit-seeking financial services firms – including some well-meaning financial advisors – have an incentive to closely monitor who stands to receive a financial windfall. Finally, the frequency and, at times, seriousness of the headlines may make some Millennials feel pressure to quickly decide what to do with an inheritance.

What To Do With an Inheritance: Less May Be More

Almost all of the Millennial parents with whom I work have questions about where to open and maintain investment accounts. I often hear, “Is the account that I set up after college a problem now?” Or, “Is it okay if I still use Betterment or Robinhood?” And many of these Millennials won’t inherit a financial windfall within the next decade. So you certainly must need a new account and/or new services if you are participating in the Great Millennial Wealth Transfer, right?

Financial technology has improved our lives in numerous ways in recent years. But that doesn’t mean more is always better. Or that new is always an upgrade. Financial technology can be overwhelming. And when it comes to managing your finances, simple and straightforward is often the best approach.

With the new features and functionality that FinTech start-ups regularly create, it’s understandable that many Millennials want to have every possible financial tool at their disposal. But that doesn’t mean, though, that you should rush into a new service or account when you receive an inheritance.

What Type of Help Do You Need to Manage a Financial Windfall?

Schott and Davies, the Bloomberg reporters, briefly touched on what Millennials truly need when trying to decide what to do with an inheritance. Their comment came when reviewing the financial institutions’ marketing strategies [my emphasis below]:

“Perhaps it’s no surprise that Goldman Sachs, JPMorgan and UBS chose to go with funky, indie-approximate diffusion branding for their mid-market wealth-management bots. After all, the kids love a friendly name (Marcus!), an approachable font and an amiable block of sales copy — as we know from the unceasing wave of identikit blands flooding our Instagram feed.

But you can’t help feeling they’ve missed a trick.

True wealth management — as distinct from day-trade speculation and crypto hype — is premised on expertise, judgment and time. These are all attributes that legacy banks have in spades, and FinTech startups are working to acquire. Borrowing the branding of the latter to sell the services of the former seems like an odd choice.”

I often emphasize to clients that investing in your family’s future doesn’t need to be complicated. Similarly, when you’re trying to figure out what to do with an inheritance, first pause. Take a breath. You may benefit from expertise, certainly from a tax professional and likely from a financial advisor. But otherwise, fewer hasty actions under these new circumstances may serve you better over the long term.

How Long Does It Take to Get Inheritance Money?

As a guiding principle, you may want to act on an inheritance steadily, but deliberately. So let’s start with the most essential detail: how long does it take to get inheritance money? In writing for Real Simple, Erica Lamberg wrote, “When you are notified that you’ll be receiving an inheritance, you must understand that you’re probably not going to receive a check that week. ‘The process to receive an inheritance can be slow and tortuous,’ says Patrick Hicks, an estate planning attorney in California and head of legal at Trust & Will. ‘It may take months or years, and you may not receive exactly what you expect.’”

Lamberg encouraged her readers to “take some time to think about what you want to do with the gift.” In fact, assuming you’re not under current financial pressure, a slow inheritance process may prove helpful. You may not want short decision timelines, as you may not be truly ready to act. After all, this may be a one-time financial event that you’ve never experienced before. If so, you’ll want to make sure you’re thoughtful about the opportunity. And moving money – either into or out of an investment account – can have significant consequences, including from a tax perspective.

So “How long does it take to get inheritance money?” may not even be the best question to ask at first. Instead, consider a version of the following thought process. “Let’s say I receive an unexpected financial windfall. How could I best use that money to live the life that I want to live, either now and/or in the future?”

What To Do With an Inheritance: Tasks Not to Miss

From a logistical standpoint, what else should you do when you’re trying to figure out what to do with an inheritance? Lamberg’s article offered two other helpful pieces of advice to consider before you receive any financial windfall: 

Seek advice from specialized professionals as needed

Patrick Hicks, the head of legal at Trust & Will, believes that “it’s a good idea to consider a financial checkup to help you plan for any changes to your overall financial status, including receiving an inheritance.” In some cases, you also may want to hire a lawyer. As Lamberg notes, “Your attorney can best explain how both federal estate taxes and any applicable state inheritance taxes may impact your inheritance. The taxes that are levied also depend on factors including your personal wealth, the state you live in, and the amount of your inheritance.”

Make sure to create or update your estate planning documents

David DuFault, an attorney and principal with Sodoma Law in North Carolina, advises, “If the inheritance you’re receiving is significant, the likelihood that your own children or family will inherit a larger amount could require additional documents, such as a trust, to control or protect them.” But even if these specific circumstances don’t apply to you, an inheritance creates an excuse for you to plan an estate. Almost no one, especially busy Millennial parents, wants to set aside time or energy for estate planning. But the occasion of a one-time financial windfall may help you feel the motivation to make sure all of the necessary documents are in place. 

A Millennial Inheritance Example: a Vanguard Inherited IRA

Perhaps you’re not sure what to expect when you receive an inheritance. I’ve encountered several Millennial clients in recent years whose family members left them funds held in a traditional IRA at Vanguard. So to try to help, I’ll briefly describe what a Vanguard inherited IRA involves.

Vanguard notes on their website that, “Being named a beneficiary means that someone has passed away and they’ve named you as the person to receive all or a portion of their assets.” In the case of a Vanguard inherited IRA, though, you don’t just receive a check in the mail. Instead, you first need to transfer account ownership into your own name. Fortunately, this process has, in some cases, become easier. At Vanguard, you may be able to transfer account ownership entirely online. But you’ll need the full Social Security number for the person who passed away. You’ll also need a digital copy of their death certificate.

After Vanguard processes your request, you’ll have the opportunity to make decisions about the investment allocation, withdrawals, and taxes. But once you do control a Vanguard inherited IRA, pay close attention to IRS distribution rules. As Investopedia describes, “Starting with those [traditional IRAs] inherited after Jan. 1, 2020, the SECURE Act requires the entire balance of the participant’s inherited IRA account to be distributed or withdrawn within 10 years of the death of the original owner.” You must pay income taxes on the distributions. And you must empty the account within the specific timeframe if you don’t qualify for an exception.

A Financial Windfall Still Requires Smart Financial Planning

That CNBC article I mentioned at the outset noted, “For some, gaining sudden wealth could mean finally being able to buy a home, pay back student loans, save for retirement or start a business. For others, it could mean achieving financial freedom for the first time in their lives.” That may be true for you, which is wonderful.

But a financial windfall doesn’t free you from needing to make thoughtful financial decisions. If you want to make the most of your inheritance, especially over the long term, you don’t get to stop managing your money prudently. And for most Millennials, many of your existing savings and investment goals won’t change. Perhaps, then, the best answer to what to do with an inheritance is “more of the same.” But in this case, you’re getting a small boost from someone who cares about you, your financial stability, and the life you ultimately live.

What questions about the “Great Millennial Wealth Transfer” do you have at this point? I encourage you to send me an e-mail at kevin@illumintfc.com. I’d love to hear about the other inheritance information you’d like to know. And subscribe to my finance podcast for Millennials to learn more about how you can invest for your future.

[Editor’s note: this article reflects the transcript (which I’ve edited for clarity) of a recent Financially Well podcast episode.]

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About Kevin Mahoney, CFP®

Kevin Mahoney, CFP® is the founder & CEO of Illumint, an independent firm in Washington, DC that offers financial planning for Millennial parents. He specializes in navigating the new financial decisions that arise during our 30s and early 40s, such as repaying student loans, buying a house, saving for college, & investing for the future. In addition, Kevin also leads a financial wellness benefits program for Millennial employees around the country, including group speaking engagements.