4 min
Managing an Inheritance: Smart Tips for Lasting Financial Security
Inheriting a large sum of money can be a life-changing event, but it’s important to handle it with care and wisdom to ensure it creates long-lasting value. Whether it's from a loved one or another source, making informed decisions can help secure your financial future rather than rushing into quick choices that could lead to mistakes. By following key steps, you can manage the windfall thoughtfully, minimize risks, and still enjoy some of it along the way.
Summary
Inheriting a large sum of money can be a life-changing event, but it’s important to handle it with care and wisdom to ensure it creates long-lasting value. Whether it's from a loved one or another source, making informed decisions can help secure your financial future rather than rushing into quick choices that could lead to mistakes. By following key steps, you can manage the windfall thoughtfully, minimize risks, and still enjoy some of it along the way.
🤓 Keep your inheritance to yourself (for now)
Financial advisors often recommend the first move after receiving an inheritance: staying quiet about it. While you may want to celebrate and share the news with others, it's wise to limit this information to only one or two trusted people, such as a close family member or friend. These should ideally be individuals who have no expectation of receiving a portion of the money. Doing so gives you time to make clear-headed decisions, without external pressures or premature promises.
Takeaways:
• Keeping quiet about your inheritance prevents unnecessary pressure and allows you time to plan.
Key Terms
• Inheritance: The money or assets passed down to an heir from a deceased person.
• Financial advisor: A professional who provides financial planning and investment advice.
🕒 Take your time
It’s natural to feel anxious about leaving a large sum of money untouched, especially when you hear phrases like "time is money." However, taking the time to pause and reflect before making any big decisions is often the smartest move. Rather than rushing into investments, let your funds sit in a high-yield savings account while you explore your options and avoid making emotional, hasty decisions. Waiting can provide clarity, and it also helps minimize impulsive mistakes that could harm your long-term financial goals.
Takeaways:
• Pausing to reflect on how to manage a windfall can prevent rushed and poor investment decisions.
Key Terms
• Compound interest: The process where the value of an investment grows because the interest earned accumulates additional interest.
• High-yield savings account: A type of savings account that offers a higher interest rate than the average.
👩💼 Work with a financial advisor to create a financial plan
A well-rounded financial plan can help you make the most out of your inheritance. This is an ideal time to consult with a fee-only, fiduciary financial advisor who can help you craft a comprehensive roadmap. Regardless of the amount of money involved, a financial plan prioritizes your goals, such as early retirement, funding a child’s education, or giving back to charitable causes. Additionally, having an expert guide you can prevent rushed decisions, providing long-term benefits for you and your family.
Takeaways:
• A holistic financial plan, with the help of an advisor, can align your inheritance with your life goals.
Key Terms
• Fiduciary: An individual legally obligated to act in the best interest of their clients.
• Donor-advised fund: A charitable investment account that supports giving to your favorite non-profit organizations.
💡 Consider taxes on the inherited amount
It’s crucial to understand the tax implications of your inheritance. While there is no federal inheritance tax, estate taxes may apply, especially for estates worth more than $12.92 million (as of 2023). Additionally, some states have their own estate or inheritance taxes. Consulting with a financial or tax advisor can help you navigate these regulations and ensure that you pay the appropriate amount without overpaying.
Takeaways:
• Estate and inheritance taxes vary by state, and federal estate tax exemptions apply to large estates.
Key Terms
• Estate tax: A tax levied on the net value of a deceased person's estate before distribution to heirs.
• Inheritance tax: A tax some states impose on individuals who inherit assets from a deceased person.
🎉 Enjoy it
Once you’ve set up your financial plan and addressed all legal and tax concerns, it’s perfectly fine to enjoy a portion of your inheritance. Whether it’s treating yourself to a vacation, a new car, or a home renovation, you can take a set amount for indulgence while ensuring that the rest of your funds are working for you long-term. The key is to make sure these fun expenditures come after you’ve thoroughly planned and allocated the majority of your inheritance toward future financial security.
Takeaways:
• Enjoying a portion of your inheritance is healthy once a financial plan is in place.
Key Terms
• Discretionary spending: The portion of income left for fun, luxury, or non-essential items after saving or investing.
• Allocation: The process of assigning or distributing resources for a particular purpose.
Conclusion
Receiving an inheritance is a moment of opportunity, but it’s also a responsibility. By following these steps—keeping quiet initially, taking your time, seeking professional advice, and understanding taxes—you can set yourself up for long-term financial success while still enjoying some of the benefits of your windfall. Careful planning will help ensure that your inheritance serves you and your loved ones for years to come.
