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An inheritance is a double-edged sword. You receive an unexpected windfall, but the reason for it is the death of a loved one. In addition to complicated emotions, you may be dealing with the largest sum of money you have ever seen.
No one is born knowing how to handle an inheritance, and few people are prepared for it.
However, if you have inherited something, you can take a few steps to put the money to good use.
Decide who you want to tell
The philosopher and scientist Francis Bacon once said: “Discretion in speech is more than eloquence, and to speak pleasantly to the person with whom we have to do is more than to speak with good words or in good order.”
Knowing what to say and how to say it is difficult, especially when you are experiencing something for the first time. On top of that, we live in a society where it is easy to give away too much of your life with constant access to social media.
You might be tempted to share your new situation online. After all, the likes, hearts, and other emoji reactions you get from sharing can give you a temporary endorphin rush. But sharing your complicated feelings online will likely backfire. If a lot of people know you have money, a lot of people will start asking you for money.
The last thing you need in a time of grief is requests for money to help your stepfather's cousin open his popcorn stand on the beach. Even sharing with close friends or family members can be unwise. Both friends and family members might treat you differently if they think you're receiving an unexpected windfall.
If you are inheriting for the first time, tell your spouse and a tax advisor. Even if your friends suspect you have inherited, they don't need to know how much money you got.
Later, you may want to share the information with other financial advisors, your children, or charities you choose to support. Sharing may be the right choice, and you can always share more information. Rather than sharing everything at once, take time to decide who needs to know what.
take time
If you're a proactive person, you may want to invest your inheritance right away. While that may be tempting, take a little time to think clearly. It's OK to wait six months or even a year before touching the money you inherited.
Use this time to grieve your loss, learn about investing, and find a trustee who can help you manage your windfall.
You may even feel ready to invest after a month or so. But after speaking to many people who have suffered a loss, almost all of them wished they had waited six months or more. You simply can't avoid what a big loss does to your mind, and you may not make the best decision even if you think you are.
So what do you do? Just park the money in a savings account.
Avoid quacks
There is no need to rush to pay off your debts or invest for the future. Even if you rush into getting “educated,” you could be vulnerable to quacks. Life and annuity salespeople have particularly sophisticated sales pitches that could fool you during a period of heightened emotions.
A life insurance policy or an annuity may make sense for you, but take time to consider your options and seek advice from a fiduciary before making any major financial moves. Fiduciary means that a financial professional must have your best interests in mind when recommending a product or service.
After a windfall, seek advice only from fiduciary financial advisors. If a person cannot give you a clear answer as to whether they are a fiduciary, you should turn away from them. Good advice will allow you to adjust in the future. Bad advice could leave you in financial trouble for years to come.
If you need to spend money right away, consult a certified financial planner (CFP) before you spend too much of it. A CFP can help you develop a sustainable withdrawal strategy so you don't run out of money too soon.
Follow the order of financial transactions
A financial advisor can help you develop a tax-efficient plan to manage your inheritance based on your situation and goals. An advisor will help you take stock of your finances and create a detailed plan for how you will use your money.
They have the expertise to make good decisions about the money you inherit. In most cases, your advisor will instruct you to follow a sensible order that includes paying off high-interest debt, investing for retirement, developing a charitable giving plan, and more.
The financial process of the operations includes:
Create an emergency fund. Saving for emergencies isn't fun or exciting, but it does give you a solid foundation. An emergency fund can help you survive broken cars, broken bones, job loss, or other financial disasters.
Pay off debts. If you have debt, an inheritance can help you pay it off. Depending on the amount of your debt and your inheritance, you may be able to pay off all of your consumer debt.
Investing in the future. A well-diversified investment portfolio can grow your inheritance. Even if you need some money today, investing can help ensure you have enough money in ten years or more.
Donate to charity. Giving money to charities can be a way to enjoy your new wealth, honor the person who died, and build a better future. And you can probably afford to give more than ever before. But don't start giving indiscriminately. You may be able to make a big impact through well-planned charitable giving. A financial advisor can help you plan a tax-efficient giving strategy. They may recommend using a Donor Advised Fund (DAF) or other structures to maximize your giving and minimize your taxes.
Enjoy your inheritance now and in the future. You don't want to blow your entire inheritance on cheap vacations, Amazon purchases, and Uber Eats deliveries. But that doesn't mean you can't spend your inheritance. Instead, think of impactful ways to spend money that bring joy to you and your family.
Stick to the plan
Preserving wealth and growing it over time isn't magic. But a good plan from a financial advisor isn't enough to grow your wealth. You have to stick to the financial plan you create. Overspending, especially when buying expensive items like RVs, homes you can't afford, and cars, can lead to wealth depletion.
Stick to your financial plan. Make sure major purchases are part of your financial plan before selling hundreds of thousands of dollars worth of assets to fund your lifestyle.
Last try
No matter where your financial windfall came from, the money you received is now under your management. Take your time, consult with real financial experts who are on your side, and stick to your plan. Taking these steps will give you the best chance of enjoying the inheritance, growing your wealth, and using your money wisely.
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