5 Tips for Dealing With an Inheritance

Anyone who is fortunate enough to receive an inheritance, whether it is large or small, can understand that it brings them unexpected opportunities — but not everyone will recognize that it also can present some challenges.

The Boston College Center on Wealth and Philanthropy projects that the parents of baby boomers, and boomers themselves, will leave wealth and assets worth at least $41 trillion — and possibly as high as $136 trillion — to family and philanthropy over the next 47 years¹. That means that many people will find themselves on the receiving end of an inheritance.

No matter how the inheritance comes about, the initial excitement and thankfulness might also be coupled with feeling overwhelmed by the responsibility. One way to handle that responsibility is to be discerning in the way you use it, out of respect and gratitude for the person(s) who made the gift possible.

Are you prepared to deal with an inheritance?

For most people, the answer is “no.” Here are five tips to help you manage your newfound wealth wisely:

#1: Take your time

Grieve and heal before you make any decisions. Although it is possible to receive an inheritance from a person who is living, an inheritance almost always comes about because of the death of a loved one. This can be a very emotional time.

One of the best things that you can do is “park the cash.” Deposit the money into a savings account or another safe investment for a length of time between one month and one year to allow yourself time to heal before you make any major financial decisions. However, if the inheritance is not cash, you should seek an assessment from a financial expert or tax professional as to any time sensitive decisions that must be made. When an inheritance comes in the form of real estate or an investment portfolio for example, they often need to be reviewed sooner than later because delays may result in penalties.

#2: Consider your financial goals

Invest in your future. Before deciding what to do with your inheritance, you should take a look at your short, mid, and long-term financial goals. Take the amount of money that you have inherited and figure it into your total financial picture; then, try to allocate part of it to each of your goals.

In the short-term, you might want to spend a portion of the money on something that will improve your quality of life now, such as a new car or a home. Keep in mind your medium and long-term goals — such as helping your children pay for college and funding your retirement. Using part of the money to boost your retirement savings is one of the best ways to guarantee that your inheritance has a positive, long-term effect on your life.

#3: Develop a plan

Consult a financial expert such as the CERTIFIED FINANCIAL PLANNER^™ professionals at MMBB Financial Services. No matter the amount of your inheritance, it is a smart idea to contact a financial planner for advice on how to understand and manage your inheritance.

When you receive stocks, bonds, life insurance, retirement accounts and property you might be faced with considerable federal and/or state inheritance taxes.

Working with a financial expert or tax professional will enable you to arrange for the sale of any assets and deal with the tax implications.

#4: Pay down debt

Look at your debt strategically and pay off only “bad” or high-interest rate debt, such as credit cards, personal loans and car loans. You may not want to pay off your mortgage, since you might realize tax benefits on the interest payments.

Consider funding an emergency savings account with three to six months’ worth of living expenses so that you will not have to rely on credit in the future.

#5: Do something for yourself

Set aside a small amount from your inheritance — perhaps 5% to 10 % — to spend on something special. Perhaps a new car or a family trip. Just remember what your inheritance is worth and avoid the tendency to overspend.

A sizable inheritance can represent a life-changing opportunity when it is prudently managed. And for many of us, it is a once-in-a-lifetime gift that we do not want to squander.

The loss of a loved one often makes us think about our own mortality and the legacy that we would like to leave behind. There are many ways to accomplish this, such as remembering the person that left you the money by contributing to a charity or setting up a trust or foundation.

It is also the perfect time to think about your own estate and the plans you need to make in order to leave an inheritance for your loved ones. As you consider how best to use your inheritance, let it serve as a reminder to be sure your will is up to date and that you have designated beneficiaries for any accounts you have. As a benefit of membership, MMBB has CERTIFIED FINANCIAL PLANNER™ professionals available to answer your questions and assist you in your financial planning and estate planning needs. For more information, please contact us at [email protected] or 800-986-6222.

¹http://money.cnn.com/sales/major_moments/nestegg/inheritance.html

Portions of this article appeared in the May/June 2018 issue of Church Executive magazine.