Smart ways to manage an inheritance
Deciding what to do with an inheritance can bring about mixed emotions: a sense of reprieve because of this unexpected financial gain and sadness for the loss of a loved one.
It may also push you out of your financial comfort zone and create anxiety about how to best manage the money. Here are some pointers that might help.
Go slow; get organized. Don’t rush to make any major decisions about the money. It’s important to take time and consider your options with a clear head while the money is parked somewhere generally safe. Your best bet may be an FDIC-insured account, money market or CD while you take time to come up with a thoughtful plan.
Consult with a trusted tax professional about how much you may need to set aside for taxes. That new money might not be all yours to keep. Although some types of inheritances could be tax-free, others may be subject to federal, state and local income taxes.
Understand what you’ve inherited – real estate, bank accounts, brokerage assets, retirement accounts, a trust account, and so forth. Each asset has different requirements for transfer and may offer the recipient certain advantages or disadvantages.
Use the funds in a way that could improve your personal financial situation. You may want to pay off high-rate, non-deductible consumer debt, or tackle other liabilities such as student loans or your home mortgage. Be prudent in how you spend; don’t buy a new boat unless you can really afford it.
If you inherit a portfolio of stocks, bonds or other financial assets, find out if you owe any federal or state inheritance tax. Here again, consult your tax professional. Determine if the inherited assets fit with your investment goals and needs, as well as your risk tolerance. Consider selling investments that aren’t right for your situation. For example, an inherited stock portfolio might add too much risk to your existing asset allocation. The good news is you may be able to sell without owing taxes if you receive a step-up in cost basis on the inherited investments.
If you inherit a retirement account such as an IRA or 401(k), it is important to seek advice from a trusted advisor. There are numerous rules governing inherited retirement accounts based on factors like your relationship to the deceased person and the type of account. These rules can impact your tax bill as well as how you tap the money in the account.
To manage an inheritance, get a professional, comprehensive review of your finances. Inherited wealth may call for an updated investment strategy that reflects your new tax, estate-planning and cash-flow situation.
Review your insurance needs. More wealth could mean you have more to protect. An insurance review can tell you if you still have the appropriate amount of life, health and liability insurance, or if your new situation suggests additional coverage.
Finally, consider the advantages of giving to charity. Americans donated nearly $450 billion to charitable organizations in 2019, according to Giving USA – with almost 70 percent of those gifts coming from individuals. A charitable gift account or trust can help you put some of your new wealth to work supporting favorite charities and causes.
