Various conflicting emotions often accompany the receipt or notification of inheritance. On the one hand, you are happy to accept the inheritance, be it a priceless heirloom, an object rich in sentimental value, or a cash windfall. On the other hand, you are faced with the fact that you are receiving this inheritance because someone, and likely someone that you cared very deeply about, has passed on. Mixed in with these sentiments is the urge-in the case of a monetary inheritance-to splurge on something that you have always wanted, be it a new car, a cruise, or an upgraded home.
When faced with all of these feelings and emotions at the same time, you may begin to feel overwhelmed, particularly if you are smart enough to realize that you should be investing at least some of your inheritance, but aren’t sure exactly how to go about it. This article is written with the assumption that you have received (or have been named beneficiary) of a monetary inheritance and has been written to provide you with suggestions for wisely managing the said inheritance.
Five Tips for Handling Your Inheritance
1. Determine exactly what you currently have, and what you are owed: In most cases, dispersal of your inheritance involves more than just a check from the executor of an estate. Instead, you will likely receive separate monies from individual investments. Usually, you receive these monies on a “stepped-up basis,” which means that the cost bases of the assets are determined as of the date of death. It would help if you also were aware that you wouldn’t necessarily receive all of the assets at the same time. For these reasons, it is essential to sit down with your financial planner and determine precisely what the monetary value of your inheritance is, how it is invested, and what the cost basis is. It is also important to know where the money is coming from since different types of accounts (like Individual Retirement Accounts or Insurance benefits) have a different protocol for withdrawing funds. Remember that this is your money, so don’t be afraid to be proactive and ask for it.
2. Make a list of your short-term and long-term goals: Of course, it is very tempting to spend sudden windfalls on short-term goals such as buying a car, sending children to private school, taking that cruise around the world, etc. What you need to consider before you splurge, however, are your long-term retirement goals, and whether you will be able to meet them sufficiently. This is where your financial planner can be an invaluable asset, as they can work with you to help you develop a plan that provides you with future financial security and hopefully a little splurge room as well.
3. Decide on exactly how much money you want to use for a splurge: Once your spending plan is in place, and you can see how much money is available for meeting your short-term goals, the next step is to decide how much of it to use to purchase splurge items. Most experts recommend setting up a separate account for this money. This way, when it is gone, you will be less tempted (and able) to spend any more of your inheritance.
4. Put the equivalent of three to six months of regular expenses in an emergency fund: This is something that you and your financial planner should discuss, and it is a potential life (and credit) saving strategy in case of an emergency. This money should be put into a short-term, fixed-money –market account.
5. Develop an investment strategy for meeting your long-term goals: With proper investing, the money that you have set aside to achieve your long-term goals can grow substantially.
While there are many options for investing, here are two that you may want to consider:
Your long-term goals may include providing financial security for your loved ones, and if so, you should consider putting some of your inheritance into a permanent life insurance plan. Life insurance beneficiary proceeds are usually not subject to probate, and permanent life insurance can also offer many living benefits such as tax-deferred cash value accumulation, the ability to borrow from cash value on a tax-free basis, and the eligibility to earn dividends as declared by the insurance company, although it should be pointed out that dividends are not always guaranteed.
Many people decide to place their inheritance money in annuities to grow long-term funds for the future. Annuities are flexible, tax-deferred investments that can be used to help achieve long-term goals and provide a source of retirement income. The money in an annuity accumulates tax-deferred, which means that you will only pay taxes on your earnings when the money is withdrawn. You should know, however, that any withdrawals made before age 59 ½ may be subject to a 10% IRS penalty tax.
There are many different types of bonds available, and your financial institution, as well as your financial advisor, can help you decide which bonds are right for your investment purposes. US Government bonds carry some tax deferment benefits, while other types, like mortgage bonds, require higher investment yields but are generally considered more aggressive. The kind of bond that you choose should also reflect your investment personality and be consistent with both your short and long-term goals.
Your Inheritance: A Loving Memory
However tempting it may be to spend your entire inheritance in one fell swoop, remember that the person who provided this inheritance to you did so in hopes that you would use it both wisely, and in their memory. You owe it to this person, as well as to yourself, to spend your inheritance wisely, and your certified financial planner is the person most qualified to help you do so.