The Great Wealth Transfer has begun: Cerulli Associates reports that baby boomers are set to leave a collective $105 trillion to their heirs by 2048, making Millennials and Gen Z much wealthier in the process [1].
For Ryan, this process has already begun. He’s dealing with the passing of his beloved mother, and the funeral arrangements, paperwork and all the tasks that come with the end of life. He is also faced with decisions that will affect his financial future: Ryan’s mother left him a portfolio of mutual fund investments that is worth about $500,000.
This substantial amount of money could help him get on track with his finances, but he’s not sure what to do for the best.
Inheriting a large amount of money, property or investments can feel overwhelming when you are also faced with the grief of a loss. Giving yourself time to make a decision and investing in expert advice can go a long way in making sure you choose what’s best for your future.
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What happens when you inherit investments?
Since Ryan is inheriting his mother’s investments, a step-up in basis provision would apply. This means that the taxes owed on any capital gains won’t be calculated from the time the investments were made (in this case, the late 1990s) to the time when they are sold. Instead, the cost basis is calculated on the date he inherited the assets.
In other words, any capital gains taxes that Ryan will pay if he sells the investments will be based on the value of the investments at the time of his mother’s death compared to the value when he sells them.
Whether Ryan should leave the investments untouched or sell them is a highly personal question, and depends on his unique circumstances. For Ryan, since he still has some student loan debt, his first instinct is to sell some investments and pay down his debt. And before he came into this inheritance, he’d also been planning to start saving for a down payment for a home — and this money could give him a huge leg up on that.
Read more: Robert Kiyosaki warns of a ‘Greater Depression’ coming to the US — with millions of Americans going poor. But he says these 2 ‘easy-money’ assets will bring in ‘great wealth’. How to get in now
To sell or not to sell?
What type of investments you’ve inherited may also be a factor when weighing what to do with an inherited portfolio.
Mutual funds are an investment where individual investor’s assets are pooled to invest in stocks, bonds and other money market instruments, with the investments managed by a fund manager. Mutual funds are generally considered safer than individual stock picking because of this professional oversight, but some investors warn that these funds come with high management fees that eat into the value of the returns.
As such, Ryan may find mutual funds don’t quite meet his needs. Exchange-traded funds (ETFs), on the other hand, tend to have lower fees and also can be more tax efficient when it comes to capital gains.
And since Ryan is still young, he may be interested in choosing a different mix of higher-risk, higher-reward investment types. If he opts not to cash out the fund, he may still want to review the performance of his mother’s investment fund over its lifetime, and potentially choose a higher return investment type on the advice of a financial advisor.
Selling mutual funds
If Ryan chooses to cash out some or all of his mother’s investments, the good news is that mutual funds are highly liquid. Mutual funds typically keep large cash reserves to cover investor redemptions — good for investors who want regular access to their money, but another reason why some investors see mutual funds as having poor returns, since this part of the fund isn’t used towards growing wealth.
Ryan should be aware that he may have to pay a redemption fee on the funds, in addition to any taxes that may be owed on the capital gains.
Choosing a new portfolio mix depends on your financial goals and how long the money will be invested for.
Ryan might also consider that if he sold the mutual funds and then saved some of the earnings in a Roth IRA, his investments would grow tax-free.
Whatever decision Ryan makes, he should consult a tax professional about any possible tax implications, in addition to consulting his financial advisor.
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[1]. Cerulli Associates. “U.S. high-net-worth and ultra-high-net-worth markets 2024”
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.