Money Smart: Have You Received an Inheritance?
The Do’s and Don’ts of a sudden financial windfall.
An inheritance can come in many different forms, including investments, real estate, cash, and life insurance proceeds. While most people relish the idea of receiving a nice windfall, the passing of assets and property doesn’t always go as planned or expected.
Statistics show that the average inheritance is spent within 18 months. This can be due to several factors, but more commonly it is because people just don’t know how to manage money.
Because of this, it is recommended that you get advice as soon as possible from financial, legal, and accounting professionals. Otherwise, you may find yourself with far less money than you had hoped for.
Devising a Good Strategy
Whether or not you anticipated your windfall, it may be tempting to go out and spend it all right away. But that might not be the best idea, especially if you don’t already have enough money set aside for the future.
Here are a few strategies that can help you manage inherited funds:
• Work with a professional financial planner to build a financial road map. This is critical in keeping you on track with preserving, growing, and protecting your newfound wealth. Also, your planner can act as the “quarterback” of a planning team that includes a CPA and an attorney to help you with tax and legal matters.
There may be tax liability on what you inherit, and the CPA can help you from that standpoint. (For instance, some inherited funds such as life insurance proceeds are not taxable as income to the beneficiary upon receipt. But if you generate inter- est or other earnings on the inherited cash, investments, or property, these earnings could be taxable.) And an attorney can help you establish or revise a will or trust as a way to help you protect your assets from liability and to transfer them in the future.
• Carve out some fun money. While you shouldn’t spend all of the funds that you receive from an inheritance, individuals who leave inheritances often want their loved ones to have some enjoyment with the money.
• Lay out a plan to generate current and future income to make your inheritance work for you. Your planner can help you design an income plan that coordinates with your other income sources like Social Security, a pension, and/or government retirement-plan benefits.
Other Inheritance Options
There are other options for your inherited funds, depending on your goals. These may include:
Donating to a charity or other similar organization.
If there is an organization that is close to your heart, you could consider donating some of the inheritance. Doing so may produce tax advantages for you, as well.
Paying off or reducing debt.
Building an emergency fund.
Establishing a college fund for children or grandchildren.
Higher education costs continue to rise, so if any loved ones plan to attend college in the future, some of your inheritance could go to pay these costs. Discussion with your advisor here is also important, as you want to be aware of the pitfalls of gift taxes.
Other Things to Consider
Any time large sums of money are involved, there are important issues to be aware of before moving forward, such as:
Grace S. Yung, CFP ®, is a Certified Financial Planner practitioner with experience in helping LGBTQ individuals, domestic partners, and families plan and manage their finances since 1994. She is the managing director at Midtown Financial Group, LLC, in Houston. Yung can be reached at [email protected] Visit letsmake aplan.org or midtownfg.com/lgbtqplus.10.htm.