Were you recently notified that you will be receiving an inheritance? If so, an inheritance can come hand-in-hand with conflicting emotions. An inheritance follows the death of a loved one, and especially in the event of a sudden or unexpected loss, may cause you to experience the grief that comes with it. On the other hand, an inheritance can often mean financial freedom for the recipient. A sudden financial windfall can be a challenge to manage responsibly anytime, but particularly when you may be dealing with heightened emotions simultaneously. If you find yourself in this position, the following “Dos” and “Don’ts” can help guide you in making good use of the inheritance your loved one left you.
- Do understand the nature of the gift you were given. An inheritance isn’t always gifted in the form of cash. You might receive real property, personal property, benefits from an IRA, or even disbursements from a Trust. All too often, a beneficiary or heir is only provided with basic information that lacks details regarding the inheritance he or she received. Without critical information about the assets, managing them can be difficult.
- Don’t go it alone. It’s important to invest the time and money to consult with someone qualified to assist you with managing your inheritance. An estate planning attorney and a financial advisor can provide invaluable guidance to ensure you understand the nature and value of your inheritance.
- Do plan ahead. After consulting with an attorney and a financial advisor, you should sit down and write out a detailed plan for your inheritance considering both the now and the future. Then, be sure to consult your plan and stick to it unless there’s a good reason to deviate from it.
- Don’t spend any money before making a plan. People often make poor financial decisions when they make them impulsively. Although it might be tempting, do not spend any of your inheritance before you have your written plan in place.
- Do put money away for a rainy day. An inheritance is the perfect opportunity to put money away for life’s surprises, both good and bad. Because the money was unexpected, it cannot already be designated for something. Therefore, it presents the perfect opportunity to save money.
- Don’t let well-meaning “friends” steer you toward risky investments. You may find you are suddenly inundated with suggestions from friends, family members, and even co-workers about how you should spend and/or invest the money. Always discuss investment ideas with your legal and financial advisor to prevent being talked into potentially risky investments.
- Do invest in your own future. Always think long-term. Whether you ultimately decide to go back to school, build a small business, or simply invest in long-term investments, do not be short-sighted by failing to consider where you will be in five, ten, or even 20 years.
- Do allow yourself a “splurge.” After you have created your financial plan and consulted with an estate planning attorney and financial advisor, set aside a proportionate amount of your inheritance for a “splurge.” Keep in mind, this “splurge” is planned for, and not off-the-cuff.
- But, don’t go overboard with your splurge. While it‘s alright to splurge on something with your unexpected inheritance, make sure you don’t go overboard. Your purchase should be proportionate to the value of your inheritance. For example, if the value of your inheritance is $100,000, your splurge should not cost $50,000. Think in terms of one to two percent of the value of your inheritance.
While the Dos and Don’ts are a great place to start, there are also some additional special considerations you should take into account when you receive an inheritance.
- What if your inheritance is an IRA? If you inherit an IRA, and you must take only the “required minimum distributions,” or the minimum amount you are required to take under the Internal Revenue Code, your inherited money can continue to grow tax-deferred for as long as possible. By taking the minimum, you would barely empty the IRA by the time you reached your life expectancy. You also need to check the beneficiary designations on the account. If they remain the same, the benefits from the IRA will continue to go to the contingent beneficiaries in the event of your death. On the other hand, you also have the option to fill out a new beneficiary designation if you prefer to have the remaining IRA benefits go to different beneficiaries when you are gone.
How will your inheritance impact your own estate plan? You need to consider how your inheritance will affect your own estate plan and then make provisions to include your inheritance into your existing estate plan. In light of your inherited wealth, do you need to change any specific bequests in your estate plan? Alternatively, do you need to add gifts to additional beneficiaries and/or change the percentage you leave to existing beneficiaries? For example, if your pre-inheritance estate was valued at $200,000 and you just inherited $500,000, you need to decide what will happen to the additional $500,000 should