An Inheritance Can Be Daunting

Maybe nothing tests one’s self-discipline more than an unexpected bonanza of money. Hmm, what to do first? Buy the Tesla, fly to Europe? Oh, I know, I should invest in a horse! After all, horse people are rich, racing money must be easy money! In fact, a recent study found that adults who receive an inheritance save just half, while spending, donating or losing the rest.  And nearly 20% who received $100,000 or more spent their entire gift. Here are 4 tips what to do and 2 tips what not to do after receiving an inheritance.

What to do:

1. Keep it as yours. Husbands and wives share everything, right? Well, other than golf clubs and underwear, yes. There are limits, however, and this is one. While you will probably end up sharing at least part of this for your long-term needs, you inherited it because you had a special relationship with someone who wanted you to have this money – title whatever type of account you end up using in your name.
2. Wait. Inheritances often come loaded with emotion. Whether you feel sad, or guilty or exhilarated, emotion can prompt poor decisions. Sadness may prompt you to purchase something to cheer yourself up. Guilt may prompt you to contribute to a charity. Regardless, take six months and do nothing – just live with the money before even starting to make decisions.
3. Do spend some on yourself. You weren’t expecting this advice from a financial planner, were you? On the contrary, I’ve actually given this advice to clients. It’s important to take a portion of your windfall and do something nice for yourself…and maybe your spouse too. Life is a balancing act so remember to keep some on the fun side of the see saw.
4. Incorporate this money into your financial plan. Create that emergency fund of 3-6 months of expenses. Pay down high interest-rate debt. Or, let’s face it, unless you’re Bill Gates, investing for your financial freedom can always stand a little juice, right? Behind on saving? Take most of it and invest it as part of your overall portfolio for your future. Feel good about retirement but you’re a little shy on college savings? Investing part in a 529 account for your children might make sense. Whatever you choose, go about it thoughtfully and intentionally as part of your overall plan.

What not to do:

1. Don’t cause yourself a big tax bill. Inheritances come in many forms – IRAs, taxable investment accounts, cash, real estate, etc. Because there are so many there isn’t space here to talk about all the options. So, suffice it to say, get tax advice from a financial planner or a tax professional, or both, prior to doing anything. I recently read about a son who moved a sizeable inheritance from his father’s IRA to an investment account without establishing a beneficiary IRA first. The IRS was the one who received a $200,000 windfall, not the son.
2. Don’t keep the same investments. Chances are you’re receiving a taxable investment account or an IRA that contained investments that made sense for your donor. You might be tempted to hold on to that old IBM or GE stock because it did so well for mom and dad. Or, that bond fund they kept for regular income looks nice and safe. Invest according to your financial plan and as part of your overall portfolio. Nostalgia for investments is not a recipe for success.

Inheriting money can be a pathway to financial freedom sooner and/or a once-in-a-lifetime adventure, but the path comes with many choices. Take it slow, be thoughtful, and ask for help when you need it in order to gain the most from a loved one’s thoughtfulness.

Steve Byars, CFP®