Receiving an inheritance is an amazing transfer of legacy but also a mental burden. In addition to grieving the loss of a loved one, you are left with a myriad of decisions – decisions that can’t be rushed.
If you inherit considerable money, here are 6 steps to consider:
1. Do Nothing for a While
2. Write Down What Your Loved One Wanted
3. Write Down Your Needs and Wants
4. Understand the Implications
5. Use the Inheritance to Further Their Legacy and Enhance Your Own
6. Revisit Your Financial Plan
Let’s break these down:
1. Do Nothing for a While
I’m not an expert on navigating the emotional side of loss. What I do know is that mixing emotional turmoil with financial decision making is a recipe for disaster.
Don’t make any big decisions for a while. “A while” is different for everyone. If your spouse passes away, you might not want to immediately sell your house and move to a new state. Allow yourself to experience a bit of your “new normal” to determine if that would indeed make you happiest.
2. Write Down What Your Loved One Wanted
I’ve seen children inherit hundreds of thousands of dollars of one single stock. Obviously, they need to sell it and diversify… But they mentally can’t. Why? Because they don’t know if Dad would have wanted them to.
Honestly, I don’t know if Dad wanted them to or not. If they didn’t tell you, you must infer what they’d want. Would Dad want your inheritance to be held in a single stock that crashes after his death, leaving you nothing? I doubt it.
Strike a good balance. Your loved one might have expressed they hope you’d give to charity, pay for kids’ colleges, etc. This must be balanced with the next step of understanding your own needs.
3. Write Down Your Needs and Wants
You’re only human. When you receive money, you start to dream up what you might do with it. Buy a better house, replace your car, retire early, take the family on vacation, or whatever else.
Write down your “must haves” and your “just wants.” Refer back to this list on occasion in the coming years. Keep yourself accountable to ensure you are meeting your real needs before the wants make their way in.
Trust me, wants have an amazing way of making themselves feel like needs.
4. Understand the Implications
There are obvious implications of receiving a large inheritance. You are going to need to open accounts, find a tax professional, find a financial planner, etc. There might be less obvious implications as well:
– Are you going to owe taxes? How will you pay them?
– Did the inheritance push you into a higher tax bracket? If so, you might receive fewer benefits such as student financial aid, reduced health insurance premiums, etc.
5. Use the Inheritance to Further Their Legacy and Enhance Your Own
At this point, most of the contemplation is out of the way. It’s time to act. Your loved one left you a great legacy. Carry it on while also building your own legacy too.
Consider:
– Paying down high-interest debt (like a credit card). Ask your debtors about potential discounts for paying a lump sum.
– Gift to charities you feel honor your loved one. I have tips for tax-efficient giving HERE.
– Use goal-based investment strategies. Your “legacy” will never feel like a real legacy to you if you haven’t set goals. If you have no idea where to start, read How to Set Realistic Financial Goals. Once you have identified your goals, work with an advisor who will help you invest specifically to meet those goals.
6. Revisit Your Financial Plan
Your reality has changed. You might have had a buttoned up financial plan before your inheritance, but it might look a lot different now.
Be prepared to discuss these questions with a financial advisor:
– Do you still need to carry life and disability insurance if you have excess funds?
– Was your inheritance public? You might need liability insurance to protect yourself.
– Is your retirement funded? If so, how should extra money be used?
– Has the loss of your loved one changed your own beneficiaries?
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This blog is just scratching the surface of topics that need addressed after receiving an inheritance. Every inheritance situation is unique and really needs to be discussed with a professional. Remember though, don’t do anything for a while. Even choosing a professional is a decision that takes time and careful thought. Best of luck!
