When you inherit money it usually accompanies a very emotional time. You may be still grieving over a lost relative or friend. Sometimes the sudden wealth from an inheritance can create even more stress in your life.
So it’s really important to make wise decisions when you are not under stress.
Understanding your inheritance.
An inheritance can arrive in many different forms, and have varying tax and estate implications. You may want to discuss the details with a financial advisor, tax professional or attorney first. Here are the first things you’ll want to find out:
What type of assets you will receive. Will it be stocks and bonds, real estate, property, business ownership, IRAs, retirement plans, or life insurance?
Next, you’ll want to find out when the assets will be available to you. Will you receive the assets in a lump sum, or will it be distributed over a period of time?
Finally, you’re going to want to know the tax implications of receiving the inheritance. Will there be any major sum I’ll owe? Will I get a step up in basis?
Now it’s time to do some planning.
Now that you have an inheritance it’s time to start thinking about what you want to do with your sudden wealth. This may be the largest sum of money you’ll ever have. So it’s likely you want to do some thorough planning. You may want to think about whether your relative or friend wanted you to carry out a goal that you shared. Other possibilities for your inheritance could include:
- Adding to your retirement assets
- Dealing with upcoming taxes
- College education for your children or other family members
- Financial assistance to loved ones
- Giving to charity
- Starting a trust or foundation
- Paying off debt or a mortgage
Managing your inheritance.
Sudden wealth from an inheritance can include additional income, taxes and estate concerns. The type of investments you choose can help or hinder a tax situation. Make sure you look at ways to defer or avoid taxable investments if the inheritance increases your tax bracket significantly. Analyze the new assets along with your existing portfolio for a total picture.
If you inherited expensive property, jewelry or artwork, you may want to update your insurance coverage. Consider liability umbrella policy. It will cover lots of expensive items for a very low-cost.
In addition, update your wills and beneficiaries on your new inherited assets as well as assets you owned prior to the windfall. The inherited assets may make you rethink your estate planning needs too. So consult with a qualified estate attorney or a financial advisor. If you plan on gifting some of the wealth, make sure you document everything you do.
If you’ve just received sudden wealth from an inheritance this will get you started thinking about your next steps. Life events will cause change and some stress. Watch for my next article. Or, you could subscribe here for free, and I’ll send it to you automagically when it comes out!