Receiving an inheritance can be a bittersweet occasion. While your heart aches for your lost loved one, you’re also full of gratitude for the gift they’re leaving for you.
Because it’s such an emotionally charged situation, it’s easy to make hasty decisions and impulsively spend money you shouldn’t. That’s especially true if it comes in an amount you’re not used to receiving all at once. Having a financial advisor can help you be more objective and make plans to use the money effectively.
If you’ve just received an inheritance, here’s how a financial professional can help you manage it.
Make a Plan for the Money
Have you ever read about lottery winners who end up going broke? Or famous athletes that have no money left just a few years after leaving the league?
This happens because people don’t have a plan. One person may be able to turn a large amount of money into a lifetime of security, while another spends it in less than five years. The difference between the two comes down to responsibility and planning. Thinking of where you want to be in five or ten years may help you make long-term plans instead of putting it all toward short-term enjoyment.
Work with a financial advisor to make a plan for the money you’re receiving. Think about your future needs, from retirement to putting your children through college. Are there specific long-term goals that could be brought closer through wise investment?
Even if you don’t inherit a life-changing amount of money, it pays to have a plan. Perhaps you can pay off some debt or change an aspect of your life for the better. Whatever the amount of your inheritance, a financial planner can show you how to build wealth for your future.
Protect Yourself From Taxes
The amount of inheritance tax you face is out of your control, as it is determined based on how the estate is set up. However, you can take steps to lower your tax liability for the future by making wise investments.
For instance, if the money is in a pre-tax account, like a 401(k) or IRA, taxes will be due when you withdraw the money. That can be a big hit if you take it all out in a single year. Instead, you can withdraw part this year and part next year, or roll the entire account over to an inherited IRA account. With an inherited IRA account, you can withdraw a set amount every year, getting a regular income and a much smaller tax bill in any given year.
Alternatively, if the money is already in a post-tax account, such as a Roth 401(k) or IRA, you won’t have to pay when you withdraw the money. If the money is in a life insurance policy, you usually won’t have to pay taxes for it at all. And if the money is in an investment fund, the tax you pay will depend on whether the account has gained or lost value between when you received it and when you sell it. If the money has grown, the growth will be taxed as income, but if it’s depreciated, you can write it off as a loss.
Talk to your financial advisor about how your inheritance will be taxed, and how to best manage it to avoid losing too much of it to taxation.
Learn to Say No
Saying “no” is essential if you want to protect your inheritance and use the money for years to come. You’ll have to say no to a lot of people—friends, relatives, and yourself.
When an inheritance is distributed, there are always people who feel they should have gotten a bigger share, or relatives who will start coming to you for financial help. Maybe they have a project they want you to invest in, or they try to convince you your late loved one would have wanted you to share. Treat these requests carefully. While it’s good to be generous, you need to know when and how to say no.
You’ll also need to tell yourself no. There may be splurges that sound fun. A vacation to another country, a year of travel, or quitting your job might suddenly be attractive.
Don’t be unrealistic or make rash decisions. A financial advisor can help you review your plans and give you objective, long-term advice. If you choose to share your inheritance, an advisor can help you do so in a tax-efficient way that still leaves enough money for you. Five years down the road, you’ll be happy you made a long-term plan.
A Financial Advisor Can Help With Your Inheritance
Whether you want to make long-term investments, pay off debt, or simply explore your options, having a professional on your side makes a big difference.
We can help connect you with a financial professional that has years of experience helping others succeed. They can review how much you will receive and help you make good decisions.
With the right advice, your inheritance can become an even better gift and provide security for many years. Contact us to get started today!