What to Do with an Inheritance

You’ve received a chunk of money from an inheritance. Maybe it was expected or maybe it wasn’t. Either way, you need a plan for how best to spend, save, and pay taxes on this money and other possible assets in order to ensure your long-term financial security.

Hiring an experienced financial planner, along with a CPA, lawyer, and/or tax professional, is a really good idea, but here are some basics to get you started or to help prepare you if you think you could be receiving an inheritance anytime soon.

Time to breathe

The first thing to do is take time to grieve your loss before making any life-altering decisions. Receiving an inheritance usually comes amidst strong emotions, including possible guilt at receiving something good at a time when other family members and friends are only experiencing sadness and pain.

To avoid making financial decisions while under the influence of warring emotions, wait to start spending or giving money until you have a plan with the input of experts—don’t quit your job, sell your house, buy new cars, or promise to pay for all of your nieces’ and nephews’ college expenses, yet.

Think about putting any cash you receive as part of your inheritance into a savings account or CD/share certificate for six months to a year. This gives you time to heal, set the rest of the estate’s affairs in order, and contact a team of finance professionals to help you.

Take stock

Once you feel you can assess your new situation with a clear head, it’s time to understand what you have inherited and what it can do for you—even a modest amount can help you reach your goals. Be clear on what your inheritance includes, how you can access those assets, and how to turn them into cash, if you want.

Oftentimes, an inheritance will include stocks, bonds, real estate, and/or retirement savings. Have a lawyer help you get those items switched over to your name as soon as possible.

Prioritize goals

Should you use your new wealth to travel? Renovate your house? Put it all toward retirement? Start your dream business? Give some of it away?

Prioritizing goals and then seeing how far your inheritance will go toward achieving them is the best next step because it will allow you to achieve more of them. Most financial advisors will recommend first paying off debt so you’re no longer losing money to interest. From there, ensure you have a sufficient emergency fund saved up. Next, retirement should be a priority, followed by other goals like paying for kids’ college, home repairs, travel, etc.

Taxes

There are different tax liability rules for different heirs—for example, spouses have some tax breaks and exemptions that aren’t available for adult children or other heirs—although the general rules below apply. Consult a tax professional before making decisions about your inheritance.

Another option would be to sell the individual stocks you inherit and invest the money in a diversified mutual fund, which wouldn’t trigger a tax bill.

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