Inheriting money can be both a blessing and a source of stress. Whether you’ve received a small amount or a substantial sum, it’s important to handle this newfound wealth with care and foresight. Here’s a step-by-step guide on what you should do when you inherit money to ensure you make the most of it and help to better secure your financial future.
Step 1: Pause and Reflect
Before making any decisions, take some time to pause and reflect. The period following the receipt of an inheritance can be emotional, especially if it comes after the loss of a loved one. Give yourself the necessary time to grieve and process the change before making any significant financial decisions.
Step 2: Assess Your Inheritance
Understand what you’ve inherited. An inheritance can come in various forms, including cash, real estate, stocks, bonds, or other assets. Each type of asset has its own set of considerations and implications.
Here’s what you should consider doing depending on the asset:
- Cash: Determine the total amount and consider how it fits into your overall financial picture.
- Real Estate: Get the property appraised to know its current market value and understand any associated costs like taxes, maintenance, or mortgage.
- Stocks and Bonds: Evaluate the current market value and potential tax implications of selling these assets.
- Other Assets: This could include collectibles, antiques, or personal property. Understand their value and how they fit into your financial goals.
Step 3: Consult Professionals
Inherited money can have complex tax and financial implications. It’s wise to consult with professionals to ensure you’re making informed decisions:
- Financial Advisor: A financial advisor can help you create a plan for your inheritance, considering your current financial situation and future goals.
- Tax Professional: Taxes can significantly impact your inheritance. A tax professional can help you understand any tax liabilities and strategies to minimize them.
- Estate Attorney: If the inheritance involves real estate or other significant assets, an estate attorney can guide you through legal complexities.
Step 4: Pay Off Debts
If you have outstanding debts, using a portion of your inheritance to pay them off can be a prudent decision. Prioritize high-interest debts, such as credit card balances, personal loans, or payday loans. Reducing or eliminating debt can improve your financial stability and reduce stress. Talk with a financial professional before using your inheritance to pay down debt as there may be other more financially beneficial options to consider.
Step 5: Establish an Emergency Fund
An emergency fund is crucial if you do not have one set up already. Aim to save three to six months’ worth of living expenses in a liquid, easily accessible account, such as a savings account or money market fund. This fund acts as a safety net for unexpected expenses or income disruptions.
Step 6: Invest Wisely
Investing your inheritance can help it grow over time and contribute to your long-term financial goals. Consult with a financial professional if you are considering one of these options:
- Stock Market: Investing in stocks or mutual funds can offer higher returns, but comes with higher risk. Diversify your portfolio to mitigate risk.
- Bonds: Bonds can provide steady, reliable income with lower risk compared to stocks.
- Real Estate: Investing in real estate can offer rental income and potential appreciation. However, it requires active management and can be less liquid.
- Retirement Accounts: Consider contributing to retirement accounts like an IRA or 401(k) to take advantage of tax benefits and ensure a comfortable retirement.
Step 7: Save for Future Goals
Think about your long-term financial goals and how your inheritance can help you achieve them. This might include:
- Education: Funding education for yourself, your children, or grandchildren.
- Homeownership: Making a down payment on a home or paying off an existing mortgage.
- Starting a Business: If you’ve always dreamed of starting your own business, your inheritance can provide the necessary capital.
Step 8: Consider Charitable Giving
If you’re financially secure, consider donating a portion of your inheritance to charitable causes you care about. Charitable donations can provide tax benefits and give you the satisfaction of making a positive impact.
Step 9: Update Your Estate Plan
Inheriting money can significantly change your financial situation. Update your estate plan to reflect your new assets and ensure your wishes are honored. This includes:
- Will: Update your will to include your new assets and how they should be distributed.
- Trusts: Consider setting up a trust to manage your assets and provide for your beneficiaries.
- Beneficiaries: Review and update beneficiary designations on your financial accounts and insurance policies.
Step 10: Understanding The Don’ts of Inheritance
1. Don’t Rush into Big Purchases
Don’t: Immediately spend your inheritance on large, impulsive purchases such as luxury cars, expensive vacations, or lavish homes.
Why: Impulsive spending can quickly deplete your inheritance. Take time to plan and prioritize your financial goals.
2. Don’t Neglect Tax Implications
Don’t: Overlook the tax consequences of your inheritance. Different assets have different tax treatments, and failing to plan can lead to unexpected liabilities.
Why: Understanding tax implications ensures you maximize the value of your inheritance and avoid penalties.
3. Don’t Ignore Estate Planning
Don’t: Neglect to update your estate plan after receiving an inheritance. This includes your will, trusts, and beneficiary designations.
Why: Failing to update your estate plan can result in unintended distribution of your assets and potential legal disputes.
4. Don’t Forget to Plan for the Future
Don’t: Spend your entire inheritance without considering your long-term financial goals, such as retirement, education, or healthcare.
Why: Planning for the future ensures that your inheritance supports your long-term financial stability and goals.
5. Don’t Overlook Charitable Giving
Don’t: Forget to consider donating a portion of your inheritance to charitable causes you care about if that is important to you.
Why: Charitable donations can provide tax benefits and allow you to make a positive impact on causes that matter to you.
Inheriting money or assets is a significant life event and you should take pause and give it thoughtful consideration and planning. By following these dos and don’ts, you can make informed decisions that could enhance your life or help you achieve your long-term goals.
Remember, seeking professional advice is crucial to navigating the complexities of inheritance. If you need personalized guidance on managing your inheritance, don’t hesitate to reach out.
Need further financial guidance?
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Donna understands first hand that life has many transitions. Having been widowed suddenly at age 40, reinventing her career, and blending her current family, she understands these unique needs and can give you clarity for moving forward!
Donna (Sephton) Kendrick, CFP®, CDFA®
This blog is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
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