Managing Your Inheritance

Receiving a significant inheritance can be life-altering. For those just starting out or just making ends meet, an inheritance may mean the ability to establish a retirement account or purchase a home. Inherited money can pay for a college education that might otherwise have required incurring significant student loan debt, or pay off existing high interest debt. For those who are better established financially, inherited funds may create a new level of security, allow for direct investments, serve as  the foundation for a multi-generational trust, or provide seed money for a business.

Posted on August 20, 2018

Unfortunately, that’s not always how an inheritance plays out. Researchers at Ohio State University found that about 30% of Americans who received an inheritance had spent or lost all of the money within two years. While the numbers improve somewhat as the amount of the inheritance increases, nearly one in five of those receiving $100,000 spent or lost it all. Like lottery winners, some people who inherit relatively large sums of money end up worse off than they were before they received the funds.

Some people preparing to leave money to family members and other loved ones recognize the risks and take precautions, such as putting the money in trust to be paid out over time or spent only for particular purposes. Often, though, heirs and beneficiaries receive a lump sum payment. Those funds may represent a bequest through a will, a payout from a living trust, proceeds from life insurance, or a inherited retirement account.

If you have or expect to receive a direct inheritance, stop and think. Take time to educate yourself about managing your inheritance so you can make the most of the gifts your loved one left.

Making the Most of Your Inheritance

The first step toward managing your inheritance responsibly and profitably is to commit to taking your time and acting methodically.

First, make sure that you’ve handled any tax obligations associated with the inheritance. New Jersey has eliminated estate taxes, and federal estate tax impacts only a tiny fraction of very high value estates. However, depending on your relationship to the deceased, you may be responsible for inheritance taxes. Be sure you know the post-tax value of your inheritance and make tax payments or set aside the funds before you make or commit to any expenditures.

Then, take your time. Consider your goals and priorities and decide what you really want to accomplish with your inheritance, but don’t act immediately. It’s easy to get swept up in the excitement of a large influx of cash, but you don’t want to make impulsive decisions. It’s important to be brutally honest with yourself in this process. Most people plan to spend less and save more than they do, and a large sum of money can appear bottomless. Be aware of your own money management strengths and weaknesses, and make sure that all of your spending and saving decisions are based on hard numbers, not a general sense of what you can afford.

If you’ve inherited a relatively large amount of money, get professional advice before making any significant expenditures. A financial advisor or investment broker can help you determine the best way to keep your money growing while enjoying some immediate benefits. Depending on the amount you’ve inherited, your next step could be as simple as increasing your retirement contributions and purchasing whole life insurance, or could involve a diverse investment portfolio.

Finally, review your estate plan. It’s a good idea to ensure that your estate plan properly reflects your current holdings and intentions any time your assets or family structure shift, and an inheritance may well mark a meaningful change in both areas.


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