When you inherit money, it means you get to be part of the legacy someone leaves behind. Figuring out the best way to honor their memory can be tough, especially when it comes on the heels of having to say goodbye.
As many as one in three households are likely to inherit wealth at some point, and nearly two-thirds of people over age 60 plan on leaving an inheritance to their kids. Researchers estimate that two in three Baby Boomer households can expect to inherit, with a median amount of around $64,000.
For many, it’s a once-in-a-lifetime event that carries a lot of emotional weight, so it matters what you do with it. Here are some guidelines to help you make your inheritance count while avoiding any lingering regrets.
Take your time.
The best thing you can do when you inherit is often nothing at all—at least at first. People who inherit often act prematurely by quitting their jobs, giving a bunch of money away or making an impulse purchase like a new luxury car. Whether your reaction is grief at losing a loved one or excitement at your newfound wealth, the intense emotions can cloud your judgment.
Plus, it’s best not to start spending until you have a clear picture of just how wealthy you actually are. Taking time to clear your head and check in with your feelings can help you make better choices about how to use your inheritance. There’s no harm in waiting three, six or even 12 months before moving forward.
“We coach clients to enter a ‘decision-free zone,’ and stay aware of their emotional states and their ability to make decisions,” says financial planner Stephen O. Wright.
Make a plan.
It’s also wise to make a plan before you start spending, no matter how much you inherit or what your net worth was before. Since heirs often feel emotionally attached to the money they inherit, it’s important to spend it in a way that feels satisfying.
“Don’t just blow it, and then regret it,” says financial advisor Janet Briaud. “Think about it carefully.”
Are you living from paycheck to paycheck? Are you drowning in debt? Do you have a solid retirement portfolio to support the lifestyle you want in your later years? You’ll want to take your current financial situation into account when deciding what to do with your inheritance.
A financial windfall tends to have the biggest impact on lower-wealth households, where the average inheritance typically equals 64 percent* of a family’s current net worth (versus 22 percent for higher-wealth households). Either way, if you play your cards right it can change both your life and your retirement for the better.
Enlist professional help.
Anytime you get a financial windfall, it’s a good idea to keep the news to yourself—at least until you’ve figured out what to do with it.
“Don’t tell anybody,” advises financial planner Johanna Fox Turner. “People would just come out of the woodwork wanting you to invest in their good ideas.”
Instead, hire a professional financial planner who can help you determine the best way to manage your new wealth.
Keep taxes in mind.
Depending on where you live and how much you inherit, you may need to pay taxes on it. As of 2017, the federal estate tax only kicks in when the total value for an individual exceeds $5,490,000, but some states may levy an estate tax on smaller amounts.
A financial planner can help you determine how much you’ll need to pay, if any. Setting aside enough money to cover taxes should be your first priority.
Have a little fun.
Once you’ve got a solid plan in place for the bulk of your inheritance, keep a little for yourself so you can enjoy the windfall you’ve received. A good rule of thumb is to spend 5 to 10 percent of a smaller inheritance, or $10,000 if you get a large amount, on something fun.
“Do something that will be a story that you like telling,” suggests one recipient of a $1 million inheritance. “Whatever you do, you’re going to end up telling that story to yourself over and over again, or to other people, so make a good story.”
* source: Forbes.com How To Make The Most Of Your Inheritance
**This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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