By Thomas Britt
Many people dream of one day receiving an inheritance, planning what they’d do with the money and how it could impact their future. But when it comes down to it, the news that an inheritance is coming your way is usually accompanied by conflicting emotions. Losing a loved one is hard, but inheriting money can be a blessing. An inheritance can improve your financial situation and offer peace of mind, and it can also remind you of your loved one’s legacy and how much they cared for you.
The unfortunate reality is that sometimes people who receive an inheritance don’t know how to properly manage it. In worst-case scenarios, inheritors blow their inheritance in a matter of years or even months, sometimes falling into more debt as a result of overspending.
You want to use these new funds wisely and avoid risking the legacy your loved one left for you, so it’s critical to approach your inheritance thoughtfully and strategically. Allow yourself time to work through this transition and explore the options available to you. As you navigate this process, keep the following in mind.
Work Through the Grief
Before making any decisions about the money, you need to process the loss of your loved one. Failing to deal with your grief can result in emotional spending that compromises the money you’ve just received. If you give yourself some time, you may become more sensitive to your loved one’s wishes or have the chance to clear your head of complex emotions.
If your loved one spent their life building and protecting their wealth, they probably hoped you’d do the same. Letting your inheritance sit for a minute can help you overcome the initial temptation to splurge on something like a fancy vacation or expensive new home. If it’s important to you to honor their legacy, don’t forget to take care of your own emotions to protect the wealth they’ve gifted to you.
Understand the Type of Inheritance You’ve Received
It’s probably a good idea to consult with a tax planning or financial planning professional so you understand what type of inheritance you’ve received. Common types of inheritances include:
- A trust account or cash
- A retirement account such as an IRA or 401(k)
- A house or other property
Knowing the type of inheritance you’ve received impacts how you access the funds, any taxes that may be associated with it, and what your options are to move forward.
For example, if you inherit a home but don’t want to live in it, you may need to learn more about potential capital gains taxes before deciding to sell the property. If you find that a capital gains tax would be too costly, you might explore another option, such as renting out the house or living in it temporarily as you assess your situation.
Likewise, inheriting a retirement account comes with its own set of considerations, particularly if you inherit the retirement account from a non-spouse. Regardless of the inheritance you receive, it’s best to contact a tax planning or financial professional who understands the intricacies of inheritance situations.
Take Stock of Your Financial Situation
Once you understand the type of inheritance you’ve received, you’re better equipped to align your plans for the inheritance with your other financial goals.
For example, if you have high-interest debt to pay off, you could improve your financial situation by paying down that debt with money from the inheritance. If your emergency fund could use a boost, you might want to set aside a portion of the money to better protect yourself from unexpected life events.
If you’re debt-free and already have a comfortable emergency fund, there are other areas in your life you may need to catch up on, such as:
- Contributing to your retirement account
- Paying down your mortgage
- Saving for your children’s college education
- Giving to a charity or foundation you care about
Consult With a Professional
As with any major financial decision, consulting a professional is the most important step. Experienced and objective advice can help curb temptation and ensure you’re not misusing the inherited money, and a trusted financial professional can also help you optimize the inheritance to build a better financial future for the long run.
We at Benchmark Wealth Management want our clients to live confidently with their future in mind. We take a holistic view of their situation to help incorporate the inheritance into their overall financial plan, boosting their financial security and reaching other financial goals. If you want to partner with a financial planner who has your best interest as their number-one priority, call 860.434.6890 or email me at firstname.lastname@example.org to arrange a consultation.
Thomas J. Britt is managing director of Benchmark Wealth Management, LLC, with 20 years of experience in the financial industry. He specializes in executive financial planning, retirement planning, investing, as well as the management of trusts and endowments. Thomas is a CERTIFIED FINANCIAL PLANNER™ professional and holds the Master Planner Advanced StudiesSM, MPAS®, Certified Investment Management Analyst® (CIMA®), and Chartered Retirement Planning Counselor℠, CRPC® designations. He earned a Bachelor of Science in Finance from the University of New Haven, an MBA in financial technology from Rensselaer Polytechnic Institute, and a Master of Science in Personal Financial Planning from the College for Financial Planning. He is also a proud veteran of the United States Navy Submarine Force. Learn more about Tom by connecting with him on LinkedIn.
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