Receiving an inheritance is a bittersweet experience. On the one hand, you receive money that could improve your financial situation and provide a safety net to fall back on. On the other hand, the grief and heartache from losing a loved one and the assets inherited are a reminder of what you lost that could be a lot to handle.
The combination of grief and gratitude will hopefully lead to a wise handling of the inheritance, but that doesn’t always happen. You want to use these new funds thoughtfully and strategically to avoid risking the legacy your loved one left for you. If you’re going through the process of accepting an inheritance or suspect you will soon, here are some things to keep in mind.
Take a Moment
Before making any decisions about the money, you need to process the loss of your loved one. Failing to deal with your grief can result in emotional spending that compromises the money you’ve just received. If you give yourself some time, you may become more sensitive to your loved one’s wishes or have the chance to clear your head of complex emotions.
If your loved one spent their life building and protecting their wealth, they probably hoped you’d do the same. Letting your inheritance sit for a minute can help you overcome the initial temptation to splurge on something like a fancy vacation or expensive new home. If it’s important to you to honor their legacy, don’t forget to take care of your own emotions to protect the wealth they’ve gifted to you.
Understand the Type of Inheritance You’ve Received
It’s probably a good idea to consult with a tax planning or financial planning professional so you understand what type of inheritance you’ve received. Common types of inheritances include:
- A trust account or cash
- A retirement account such as an IRA or 401(k)
- A house or other property
Knowing the type of inheritance you’ve received impacts how you access the funds, any taxes associated with it, and what your options are moving forward.
For example, if you inherit a home but don’t want to live in it, you may need to learn more about potential capital gains taxes before deciding to sell the property. If you find that a capital gains tax would be too costly, you might explore another option, such as renting out the house or living in it temporarily as you assess your situation.
Likewise, inheriting a retirement account comes with its own set of considerations, particularly if you inherit the retirement account from a non-spouse. Regardless of the inheritance you receive, it’s best to contact a tax planning or financial professional who understands the intricacies of inheritance situations.
Take Stock of Your Financial Situation
Once you understand the type of inheritance you’ve received, you’re better equipped to align your plans for the inheritance with your other financial goals, such as:
- Contributing to your retirement account
- Paying down your mortgage
- Saving for your children’s college education
- Giving to a charity or foundation you care about
- Buying a vacation home or taking your family on vacation
Don’t Go it Alone
As with any major financial decision, consulting a professional is the most important step. Experienced and objective advice can help curb temptation and ensure you’re not misusing the inherited money, and a trusted financial professional can also help you optimize the inheritance to build a better financial future for the long run.
We at Pinnacle Family Advisors want our clients to live confidently with their future in mind. Our goal is to align your most important priorities, such as your financial needs, family values, and charitable interests, with your financial resources in a way that is tailored specifically for you. If you want to partner with a financial planner who has your best interests in mind, schedule your complimentary introductory meeting by emailing me at [email protected], calling (417) 351-2942, or using my online calendar.
About Michael
Michael Vaughn is a Certified Financial Planner™ (CFP®) and Vice President at Pinnacle Financial Advisors (PFA) with 20 years of industry experience. Before joining the PFA family, he served clients with investment management and retirement planning at The Mutual Fund Store for 14 years. Michael graduated from Missouri State University with a bachelor’s degree in business administration and management and earned his CFP® designation in 2004. He also served 20 years in the Missouri National Guard, retiring in 2007 as a Major. He currently volunteers on the board of directors for Good Dads and Fellowship of Christian Athletes. He and his family attend Hill City Church, where he serves as an elder. Michael is married to Lori and they have two daughters. To learn more about Michael, connect with him on LinkedIn.