Inheriting Money? Do These 5 Things First
Expecting an inheritance windfall? You’re probably already making plans for what to do with the money. But there are a few things you can—and should—do to maximize the long-term value of your share of the estate and honor your loved one’s legacy.
1. Familiarize yourself with the inheritance process
If you’ve been notified by the executor that you stand to inherit, understand this is just the first step in a very long and often frustrating process. Your loved one’s estate may take a year or more to settle, and you may go weeks or months without a progress report from the executor.
Once the executor opens probate, he must collect and liquidate the assets, pay the estate’s expenses and debts, file and pay applicable taxes, and prepare an accounting of the heirs’ shares. If there are complicated assets such as real estate, business interests, or unusual personal property, the process may take even longer. Be prepared to wait; it’ll lower your frustration level.
One last thing—notice the order of settling: Expenses, debts, then heirs. You may have an idea of what you think your loved one’s estate is worth, but heirs are the last to get paid. If there are unknown debts or significant expenses, the value of the estate may be less (sometimes a lot less) than you’re expecting.
2. Know what you’re inheriting
Your options and choices will be different depending on the type of assets you’re inheriting. If you’re getting a lump sum of cash, or a bank or taxable brokerage account, you have a lot of flexibility. If you’re inheriting tax-favored accounts such as IRAs, Roth IRAs, and 401(k)s, for example, you’ll need to plan for the tax consequences of making withdrawals, especially if you’re not the surviving spouse.
If you’re the beneficiary of a trust, read it carefully so you understand the trustee’s role and responsibilities, how your inheritance is structured, and under what circumstances you can access assets.
3. Make a written plan for the money
Even if you don’t know exactly how much you’ll get until the estate is settled, it’s still a good idea to list your financial priorities. If you have a written plan, you’ll be less tempted to fritter away any money you get on bad investments and impulse purchases.
Retiring debt should be your first priority, especially high interest credit card debt and student loan debt. Depending on the size of your windfall, you may even want to pay down your mortgage to save thousands in interest. Paying down debt frees up your cash flow for other savings and investment goals.
If you’re expecting a sizeable windfall, you should consult a financial advisor, estate planning professional, and/or a CPA. A solid team of advisors will help you avoid costly mistakes so you keep more of what you inherit.
4. Invest wisely
After you’ve paid off debt, you should put your money to work building wealth for you and your family. If you aren’t fully funding your retirement, do that first, especially any company-sponsored 401(k) plan with a match. Max out your IRA contributions; if you’ve paid off debt, you’ll have cash flow to fully fund in future years, too.
Next, build a balanced portfolio of low-cost ETFs or index funds based on your age and risk tolerance. Unless you’re already an experienced investor, now is not the time to try your luck day trading or trying to beat the market. Even Warren Buffett bets on S&P index funds over hedge funds and hotshot fund managers.
5. Splurge within reason
No one will blame you for a well-thought-out splurge, least of all the loved one who left you the windfall. The key is “well thought out.” If your old sedan has served you well for years, go ahead and replace it with a more luxurious upgrade—preferably one that holds its value and won’t cost a fortune in maintenance costs. Just because you could buy a Ferrari with your with your inheritance doesn’t mean you should.
Remember the person who left you the money—and the hard work and sacrifice it took to earn and save it. Keep those thoughts top of mind when you’re planning a splurge; it will help you be more intentional about how you spend the money.
A final word of advice? Be patient while you wait for your money. You may have legitimate and pressing financial needs, but don’t rush the process with a scurrilous inheritance-funding scheme. If you’re approached by one of these businesses, shut down the conversation right away. You’ll forfeit as much as half the value of your inheritance in exchange for money today. It’s just not worth it.