7 Common Mistakes to Avoid When Receiving an Inheritance
The period following the death of a loved one can be an emotional time. Dealing with death and receiving an inheritance brings mixed emotions. The loss of a loved one is distressing, and while added funds can bring relief, it can be hard to think and plan objectively.
After receiving an inheritance, some people blow through it surprisingly quickly. Here are some mistakes people make when inheriting money and how to avoid them.
1. Not Factoring in Potential Inheritance Taxes
Depending on the size of the inheritance, you may get bumped into a higher tax bracket than you were previously. You could also be on the hook for capital gains taxes; if you’ve inherited property, you also may owe capital gains. Consider working with an attorney who specializes in estate planning in addition to talking with a financial advisor or an accountant before you spend any of your inheritance.
2. Failing to Make a Budget
If you don’t have a budget and are not used to managing money, you may not be prepared to handle significant funds. This could lead to overspending and a quickly disappearing inheritance. If you already have a budget, factoring in your new funds will help you see how it will affect your saving and spending strategy.
3. Spending Too Much
When receiving a large sum of money, you may assume that it will easily last. All too often, people fritter away inheritances by making major purchases right away, such as cars, boats, or vacations. Even if such purchases don’t seem all that significant at first, the costs can accrue quickly, especially if items you’ve purchased have additional costs, such as maintenance and insurance.
Stay grounded and take time to consider whether you truly need what you’re buying. Also, think through how much more money you could have in the future if you invest the money instead of spending it now. If you know how much you will inherit before you receive it, you can create a budget in advance.
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4. Not Paying Off Debts
Paying off debts should be your first priority if you inherit a large sum of money. Paying off your mortgage, credit cards, or student loans will give you more freedom to do other things. You will still need to balance the debts you decide to pay with the amount of money you’d like to invest for the future.
5. Losing Other Income Sources
For people relying on asset-based or income-based government benefits, such as Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), receiving an inheritance could end up disqualifying them from these crucial public assistance programs. The benefactor needs to plan for this before passing on the inheritance. Establishing and funding an appropriate trust will reduce the possibility of this happening.
6. Not Saving Enough
Suddenly coming into a large amount of money can lead you to think about all the things you can do with it now instead of how you can save and invest for your future. After paying off debts, create an emergency fund with enough money to live on for about six months. Once you have done these two things, start increasing your contributions to your retirement accounts.
7. Not Getting Expert Advice
An inheritance, especially a sizeable one, can help you achieve financial security and allow you to pursue a dream career or some other life goal. However, an inheritance can vanish surprisingly quickly if not managed well. Before doing anything with your inheritance, consult with a financial advisor, an accountant, and an estate planning attorney.
How Estate Planning Attorneys Can Help
You can work with an estate planning attorney to get assistance in setting up a trust to protect your newfound money (or property). Additionally, partnering with an estate planner can mean knowing how to safeguard your inheritance for future generations.
Keep in mind that the estate planning process may prove useful in many ways other than protecting your inheritance. A good estate planning attorney can collaborate with you to create a detailed estate plan. This may include drafting a last will and testament, durable power of attorney, medical directives, and other important estate planning documents.
By connecting with an estate planner, individuals can make informed decisions that align with their financial goals and secure their financial future. Find a qualified estate planning attorney near you today for further guidance.
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