What to do with Inheritance

What to do with Inheritance

Inheriting a substantial amount of money or property can be a double-edged sword. While it can bring financial relief, it also comes with its own set of challenges and responsibilities. This guide provides practical tips on how to manage your inheritance wisely, ensuring that you make the most out of your newfound wealth.

Understanding Your Inheritance

Before deciding on how to spend or invest your inheritance, it’s crucial to understand what you’ve inherited. An inheritance can come in various forms, including cash, real estate, investments, retirement savings accounts, and life insurance plans. You might also inherit stocks, mutual funds, or other investments in a taxable account. The value and type of your inheritance will significantly influence how you should manage it.

Deciding on the Ownership

If you’re married, you’ll need to decide whether to move the inherited money into a joint account or keep it in your name. Although it might be tempting to share everything with your spouse, remember that divorce proceedings can put your inheritance at risk. Therefore, it’s a prudent step to think about this aspect carefully.

Clearing Debts

One of the first steps you should take after receiving an inheritance is to pay off your existing debts. This can include mortgages, personal loans, or credit card debts. Paying off debts not only improves your financial health but also reduces stress and provides peace of mind.

Establishing an Emergency Fund

If you don’t have an emergency fund, consider using a portion of your inheritance to establish one. An emergency fund is a financial safety net that can cover unexpected expenses like medical bills, car repairs, or sudden job loss. Ideally, it should be enough to cover your living expenses for several months.

Splurging on Yourself

While it’s wise to save and invest, it’s also important to enjoy your inheritance. Consider setting aside a certain amount for personal indulgences, such as a vacation, a new gadget, or a spa day. This will not only bring you joy but also prevent you from making impulsive, larger purchases later on.

Dealing with Taxes

Inherited money is subject to taxes, but the exact amount depends on the type of assets you inherit. For instance, if you inherit real estate or investments, you might be eligible for a tax break known as a step-up in basis. This means you’ll only owe taxes on the difference between the asset’s value at the time of inheritance and its sale price. It’s advisable to consult a tax professional to understand your tax obligations better.

Staying in Your Job

Receiving a large inheritance might make you consider quitting your job. However, it’s crucial to think this decision through carefully. Remember, your job provides a steady income, and your inheritance might not be enough to sustain your current lifestyle for the rest of your life. Unless you have a solid financial plan, consider staying in your job until you figure out how to replace your income.

Investing in Yourself

Your inheritance can also be an opportunity to invest in yourself. This could mean going back to school, starting a business, or pursuing a passion project. Investing in yourself not only provides personal satisfaction but can also lead to financial growth in the long run.

Consulting a Financial Team

When dealing with a large inheritance, it could be helpful to consult a financial team. This can include a financial planner, a tax professional, and an attorney. They may be able to help guide you on how to manage your inheritance effectively and help you avoid common financial mistakes.

Being Tax-Savvy

Inheritance taxes can be hefty, so it’s important to be tax-savvy. If you inherit a tax-deferred retirement plan, such as a traditional IRA, you’ll have to pay taxes on the money. However, there are ways to postpone or minimize these taxes. For instance, spouses can roll the money into their own IRAs and postpone distributions until they’re 72.

The Bottom Line

Receiving a substantial inheritance can have a positive impact on your life if you handle it wisely. However, it’s important not to feel pressured to make immediate decisions and to consider seeking professional guidance when necessary.