By 2045, it is predicted that about $73 trillion in wealth will transfer to the younger generation as Baby Boomers pass along their assets to their heirs. That’s a tremendous transfer of wealth—in fact, it will be the most significant wealth transfer in US history. Most importantly, you could be one of the thousands who will be part of this exchange.
When you receive an inheritance, it can be an emotional moment, and depending on your situation, that money can serve as a lifeline or aid in achieving your life goals. However, the fact that it comes to you at a time when you are mourning the loss of a loved one can make sentiments play a role in what demands sound logical reasoning and foresight.
A lot of heirs feel a sense of responsibility when they gain an inheritance, and they would want to honour their lost loved one’s legacy by using it wisely. However, if the relationship was strained, there will likely be some guilt as the process unfolds.
So with emotions running high, you must do some strategic planning. With unlimited choices in front of you, not all of them are going to be good choices, so it’s essential first to take the time to process the loss before you make any financial decisions. This will ensure that you make thoughtful choices.
If you’re feeling alone and lost in this entire process, you’re not alone. Below, we have listed some important things to do when you receive an inheritance.
Process Your Emotions First
When you get an inheritance, you first need to take a step back. Losing a loved one is not an easy thing to deal with, so focus on your grief first. If you don’t take the time to grieve, your financial decisions will be driven by emotion, which is not healthy in the long run. Financial experts suggest at least six months to one year before you start spending your inheritance. This time frame provides insight into how this inheritance can positively influence your financial life.
Of course, the time frame would depend on your own emotional capacity, but the key is to navigate the emotional aspects of the inheritance before you decide on how and when to use it.
Know What You Are Inheriting And How It Is Taxed
Inheritances mean far more than cash or a savings account; in fact, it can be a complicated road if you don’t understand what you’re inheriting in the first place. To help you identify your inherited assets, consider this simple checklist:
– Cash and savings accounts
– Real estate properties, which may sometimes have loans attached
– Brokerage accounts
– Retirement accounts like IRAs and 401(k)s
– Collectibles or valuable personal property
Recognizing the type of assets will help you understand the next steps. If you’re inheriting property, it may sometimes have loans attached. Or perhaps you have inherited assets held in a brokerage account, an IRA, or a 401(k).
For instance, what you can do with an inherited IR would depend on things like when the account owner passed away, your relationship with them, and so on. Furthermore, inheritances are considered the heir’s personal property, and spouses usually cannot lay claim to it. But if you commingle the money with other marital assets (like depositing it into a joint account with your spouse), these protections are undone.
If you want to keep the inheritance for yourself, it’s best to put it into an account in your name only. Remember, laws vary by state, so take the time to do your research and speak to a legal professional if needed.
Consider Your Financial Goals
Ask yourself what you want to achieve in life. Is it building a home, buying a car, following your further education, starting a business, or retiring early? There is really no right or wrong answer because your goals are unique to you. You can use your inheritance to take the steps to accomplish your financial goals. When you acknowledge what matters to you, you can put your inheritance to good use.
Set Up An Emergency Fund
If you don’t have an emergency fund yet, putting a portion of your inheritance toward one is a wise decision. When you have an emergency fund set up, it gives you peace of mind knowing you can weather any unexpected financial storm that may hit you in the future.
Ideally, an emergency fund should hold about three to six months’ worth of expenses. But depending on your own needs, this could be much more.
Be Smart About Debt
If you’re struggling with debts, it may be tempting to use such a windfall to settle them. If you have high-interest debt or variable-rate loans, such as credit cards or student loans, it may be a good idea to address them first.
However, exercise caution when paying off your debts indiscriminately. For example, if you pay off the mortgage before schedule, then you can lose the tax benefits that come with the loan. This is why it’s important to understand how to use your inheritance in the most strategic way when it comes to dealing with debt.
Use Your Inheritance To Invest In Your Future
Investing a portion of your inheritance to serve as a launching pad for achieving your financial goals is a smart way to put it to good use. Whatever you’re investing in, prioritize a well-diversified portfolio with a good risk tolerance. You can also consider investing in a mix of bonds, stocks, mutual funds, and other assets; make sure that whatever you decide to invest in aligns with your vision for the future.
Honour Your Loved One’s Legacy
A beautiful way to ensure your loved one’s legacy lives on is to make a charitable gift in their name. You can use a portion of your inheritance to donate in their name to a meaningful cause, organization, or charity.
Final Thoughts
If you have an idea for how to use your inheritance but don’t know how to execute it, we recommend you enlist the help of a financial advisor. A professional can advise you on how to manage your inheritance in a way that will have a lasting impact on your financial future.
Remember, even if the inheritance is only $10,000, don’t be tempted to splurge without a solid plan in place. This is particularly true if you are not used to having so much money available at once, which can lead you to make irrational decisions. To avoid this, set aside your inheritance for 6 to 12 months and give yourself time to navigate your grief and wealth. Once the rush of emotions passes, you can be in a better frame of mind to use your wealth in the best possible way.
Imagine yourself in five years, looking back at the choices you made today with gratitude. Picture the security and opportunities those measured decisions have afforded you. This future version of yourself will be thankful for your patience and foresight, reinforcing the power of delayed gratification as you navigate through this waiting period.
