Newfound wealth affords endless opportunities—but in order to protect your assets, you need to take time to plan.
Receiving a windfall of money is something most people dream of as the solution to all their woes. However, even if it’s expected, such a windfall can pose a challenge in determining what to do with the newfound wealth.
This is especially true for millennials, who in the coming years are set to be on the receiving end of one of the largest wealth transfers in history—approximately $80 trillion is expected to pass from boomers to the next generation, according to a report by Cerulli Associates. And with millennials in line to receive the majority and still being several decades from retirement, it’s especially important for that demographic to be able to incorporate a windfall into their wealth plan in an effective way.
Bobby Lovgren, a wealth planning manager with RBC Wealth Management-U.S., cited an example of two millennials who were dealing with the unexpected early death of a parent, and were in line to receive a sizable inheritance.
“They didn’t know how much money the parent had, and their mindset had previously been that they would work for the next 40 years,” Lovgren says. “In such a situation, it’s best to take your time to figure out how to live with the loss, live your best life and honor the legacy.”
And that’s not the only type of potential windfall that millennials may have to plan for. In a December 2021 survey of high-earning and high-net-worth (HNW) millennials conducted by RBC Wealth Management–U.S., two out of three respondents said they anticipate receiving a large influx of money in the form of equity compensation, the sale of a business, or an inheritance.
But at the same time, the survey found that 72 percent of millennials don’t feel they have the knowledge, time or confidence to manage their wealth as it grows in complexity.
“The survey’s key finding is that once millennials have tackled the basics of getting a good job, establishing an emergency fund, paying down debt or maxing out their 401(k), they don’t know what to do next financially,” says Angie O’Leary, head of Wealth Planning for RBC Wealth Management-U.S. “Millennials are afraid of making financial missteps, and want assistance with planning and preparing for their financial futures.”
For those millennials expecting to receive a significant windfall, Lovgren recommends establishing a wealth plan well before you need to decide what to do with the money.
“The best-case scenario is to be one or two steps ahead of life events and for families to communicate and prepare their adult children for the wealth transfer,” he says.
Depending on the form the windfall takes, the appropriate financial strategy may vary. Here are a few scenarios that HNW millennials may begin to encounter over the coming years, and possible approaches for each.
The most common windfall millennials will likely encounter in the coming years is an inheritance from a parent or grandparent. Even though many of those inheritances may be expected, O’Leary says, millennials typically don’t want to be financially dependent on it.
“We’ve found millennials are very self-reliant, and for that reason don’t always like to include an inheritance in their plans for the future,” she explains.
Millennials also tend to have a stewardship mindset when it comes to their inheritance, O’Leary adds.
“They might feel they need to invest in a business or buy a vacation home for the family rather than just adding the inheritance to their portfolio,” she says. “This can lead to inaction in the face of such big decisions.”
If there’s no plan in place for an unanticipated inheritance, quick decisions don’t always go so well, says Lovgren. In such a situation, a “park and plan” strategy gives you time to figure out what it all means.
“If you receive $5 million in an inheritance that you weren’t expecting, it may typically be wound up in different accounts; so you can park the money in the types of vehicles it’s in now or put it in something with short-term returns and some flexibility—such as U.S. Treasury securities or certificates of deposit (CDs)—while you facilitate the next steps,” Lovgren explains.
It can take several months to put a strategy together, Lovgren adds, and if the money is held in complex accounts, it can take a year or more. Since millennials should be planning for far into the future anyway, there shouldn’t be any need to rush into making a decision around what to do with an inheritance.
In cases where an inheritance is expected, it’s important for the family to help the next generation prepare to receive it. This can help avoid the pitfalls of reliance and inaction, according to O’Leary.
One way to do this is for the family to discuss what form the inheritance may take, and what expectations the parents or grandparents may have for the recipient.
“What better way to introduce intergenerational wealth planning than by talking to adult children in their 20s and 30s about an expected inheritance and to get clarity about what it may mean for their family,” Lovgren says. “We can use the ‘park and plan’ strategy as a short-term solution, but it’s better to have a wealth plan in place for that expected inheritance that addresses the recipients’ long-term goals.”
Working with a financial advisor to plan ahead offers the benefits of being able to review all of the options that may be available for the recipient, Lovgren adds.
A re-emerging trend in the technology sector is for companies to reward employees with equity compensation.
“In these situations, employees need to understand how they will be compensated, whether through stock grants, stock options, restricted stock or an employee stock purchase plan,” Lovgren says. “These benefits are complex but are typically known in advance, which provides time to do proper planning.”
Each of those options includes important tax considerations as well as potential short- and long-term financial implications.
“We have advance planning capabilities that can help illustrate various scenarios for selling the stock, with estimated tax consequences,” says O’Leary. “It’s also important to make sure you’re diversified. People have a tendency to gravitate to what they know, so you want to make sure you don’t own too much of any particular type of stock.”
Financial advisors can help evaluate expectations for the company to determine whether it’s optimal to sell or keep stock once employees are able to make those decisions.
Typically, millennials who have a business to sell may have inherited the company, found that a relatively new business took off more quickly than expected, or had a side hustle that turned into something to monetize.
Regardless of the circumstances, “a valuation is the place to start,” O’Leary says. “We have resources to do a valuation and small-business brokers who can review options for a sale.”
In the case of inheriting a business, it’s important to understand the structure of the business, the business’s primary ownership, and whether a succession plan is in place, says Lovgren.
“There are short-, mid- and long-term strategies that vary according to the type of business and the cost basis of the inheritance,” says Lovgren. “The tax implications may be different depending on the situation.”
Whether a windfall comes in the form of an inheritance, stock options or the sale of a business, it’s important to plan ahead and discuss strategies and next steps with your financial advisor.
“As tax and estate planning need to be part of your plan, it’s important to bring in tax professionals and attorneys to help provide advice and guidance on what to do next,” Lovgren says.
Putting in the time and effort to plan around a windfall can help you manage the responsibility of your new assets and work to make it last for generations to come.
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
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