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.
If you're one of the lucky ones expecting to take over a portion of your parents' wealth, here are four things money experts want you to know about inheritance taxes and managing your newfound wealth, as well as advice on how to avoid spending too much of your trust, too fast.
What would you do if you won the lottery? This is a commonly asked question for those fantasizing about the financial future. But receiving an inheritance can also feel like you've just won the lotto.
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.
No matter your financial goals, the most important thing is to be intentional about how you use your inheritance, Douglas Boneparth, president and founder of Bone Fide Wealth, tells CNBC Make It.
"Inheriting a lot of money can help you achieve financial independence a lot sooner, but that's only if you have the discipline to not overspend and prematurely deplete your windfall," he says.
Whether or not the money you inherit will be subject to an inheritance tax "depends on the relationship of the relative and which state you live in," says Ryan Marshall, a certified financial planner at Ela Financial Group.
An inheritance tax is a state tax that you pay when you receive money or property from the estate of a person who has died. Unlike an estate tax, this tax falls on the beneficiary to pay. As of 2019, just six states in the U.S. impose this tax, Turbotax reports, so while it is fairly rare, you're going to want to know if it applies to you and the money you have coming.
The six states that collect an inheritance tax are: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Each state has its own set of inheritance tax rules, exemption amounts and rates.
Take New Jersey, for example. "New Jersey has an inheritance tax that ranges from 11% to 16% based on your relationship to the decedent," Marshall says. "Immediate family members in New Jersey are considered Class A and they can inherit without paying this tax. However, Class D beneficiaries, such as nephews, cousins or aunts, do pay the tax."
You should still be stringent with budgeting and keeping track of your spending even if you end up inheriting a large sum of money, experts say.
That's because the large number of Americans who lack financial knowledge and aren't succeeding at financial planning put the odds against you, says Carol Fabbri, a financial advisor in Conifer, Colorado.
In 2018, nearly half (44%) of Americans didn't have enough cash to handle a $400 emergency, and in 2017, just 6% of Americans managed to pass a financial literacy test administered by financial services company Financial Engines.
"Most of us aren't taught how to manage money, there are lots of bad ideas out there and we are literally hardwired to make poor money choices," Fabbri says. "Gaining an inheritance is a great opportunity to change your life, so take the time to learn about investing or find someone trustworthy to help you."
Deciphering how and where to put your trust "is specific to the person inheriting the money," Boneparth says. "If it is more money than you need to meet your current financial needs, investing could certainly be a smart thing to do."
If you aren't sure how to best manage the money you've inherited, "seek advice from a financial professional" who can help you to take inventory of your current financial state as well as your future goals, says Malik S. Lee, an Atlanta-based certified financial planner at Felton and Peel.
Should you choose to manage your money independently, accountability is key. One way to keep a tight grip on your spending is to track all of your expenses for one month. At the end of 30 days, if it seems you're unnecessarily overspending in one area, that could be a place to cut back — especially if your newfound wealth is causing you to buy more than you normally would.
You've likely heard that you "shouldn't spend your money all in one place." This logic rings true when it comes to your inheritance as well.
The tendency to overspend can become a very real problem. In the U.S., 79% of people have issues keeping their spending within their budget's parameters, and the average American admits to spending $7,429 over their budget annually, according to a 2019 poll from Slickdeals.
"There is no amount of money in the world that can fight off uncontrollable spending," Lee says. "We have seen some of the richest people in the world go broke and every time you peel back the onion, spending is usually the root cause of the problem."
One way to keep from spending too much too fast is to consider the sacrifice and hard work that likely went into earning the money you've been given.
"What inheritors don't understand is the sacrifice and commitment the person made over the years to have that amount of money," Marshall says. "If these inheritors knew what it took for the person who passed away, the inheritor may be less inclined to 'blow' the money."
Like this story? Subscribe to CNBC Make It on YouTube!