How to Be a Good Steward of Your Inheritance

When you receive an inheritance, you may experience a gamut of emotions. You’re saddened at the personal loss that has led to pecuniary gain. You’re happy to receive whatever you have and awed at the life’s work than has yielded you a bounty. Your first instinct may be to rush out and buy that nice car you’ve had your eye on for years, or maybe you’re more focused on how to best use the inheritance to honor the benefactor; however before you make any large purchases or move money between accounts, you might want to slow down and think about what good you can do with the money or assets you’ve received.

Clear Yourself (or Someone Else) of Debt

Depending on the size of your inheritance, there may be no excuse for continuing to carry large amounts of unsecured debt (such as credit cards or personal loans) and paying unnecessary interest. If you have such debt, you may want to start by looking at how best to approach paying off credit card balances, car notes, and any other loans where the interest is not tax-deductible. You can also pay down your mortgage with your newfound wealth, but it could be more beneficial to invest any excess funds before paying down the mortgage. A good idea regardless is to go through your options with a financial advisor and discuss how best to handle using your inheritance to tackle debt.

Take Care of Family

Your immediate family may not have needs right away. However, you should start to think about the future, especially if you have children. Factor an inheritance for your loved ones into your regular budget, if that aligns with your vision. If you have a set percentage of pay to spend and save, incorporate the liquidity into that budget in the same measure. If you have inherited property or other assets, talk to a financial advisor about how best to convert the asset into cash and to find out the tax consequences of doing so, or even if you should at all. If you have children, an education trust may be on your list of savings priority. Most of all, if you want to make sure that you pass on the inheritance to the next generation, that means you’ll have to think about saving and investments.

Invest

You are likely (hopefully!) already thinking of savings, Roth IRAs, maximizing retirement plan contributions, funding education vehicles for children or grandchildren and other investment strategies upon receiving an inheritance. Prioritizing which type of investment account should be funded with the inheritance is critical in making sure you maximize the benefits of the inheritance and reduce any tax consequences as much as possible. Of course, you'll want to properly balance any investments with debt reduction as well. 

Boost a Worthy Charity 

If you are knowledgeable about finances, you may know of the tax benefits of charitable donations. Giving to a charity may help reduce some taxes owed thanks to your new capital gains. You will also be contributing to your community or an organization in ways you could not before. You may establish a Donor Advised Fund or a trust that will help fund a charitable organization for years to come. As a nice touch, you could establish the trust in the name of the family member that passed on.

You don’t have to limit the gift-giving to a charity. You can spread the wealth among family and friends. Gifts have tax implications like charitable donations, so it’s something you will want to talk about with a financial planner.

Take Great Care

Some people joke about spending their paychecks before they receive them. That may be the case for you and your inheritance, especially if it is something you have been anticipating. You may want to resist the urge to splurge. You may also have previously unknown to you relatives approaching you with “fantastic” notions of business opportunities that can’t miss, or those who are in dire need. Think hard and do your homework before rushing into anything.

Talk Things Over

You shouldn’t make these big decisions alone if you hope to pay forward the legacy you received. Of course, you can talk things over with family members, though finances can be a difficult topic. You can speak with the executor of the will or trust if that’s how you received the inheritance. The executor is often someone your deceased loved one trusted enough to handle their affairs posthumously. Hopefully, that will make them a good source for advice. You can address these issues with an attorney who is well versed in finances, taxes and investments.

It may be a good time to establish a relationship with a financial advisor if you don’t already have one. It may not have made sense to have a financial advisor previously, but now that you have a new source of funds, talking to an experienced professional maybe a good idea.

This content is developed from sources believed to be providing accurate information, and provided by Strategic Financial Planning, Inc. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered legal, investment, or tax advice.