How to Handle an Inheritance

By Britt Erica Tunick

It is not uncommon for people who suddenly come into a large inheritance to blow through their entire financial windfall within several years of receiving it. If a large inheritance is in your future, or if you have unexpectedly come into a large amount of money, you should take your time and develop a long-term plan before doing anything with your newfound wealth.

According to a study done at Ohio State University, not only do roughly 33% of those who receive an inheritance spend it all, but they also wind up with negative savings within just two years of getting their payout. To avoid falling into that category, the best thing you can do right after you inherit wealth is nothing. Don’t spend anything until you’ve taken the time to assess your overall financial situation and developed a long-term investment plan to ensure the longevity of your inheritance. While it may be tempting to run right out and purchase a shiny new car, doing so before looking at your overall financial situation is unwise. Instead, the best bet is to find a trusted financial advisor who can help you determine your best investment prospects for a secure financial future.

Following are some things to keep in mind if you have recently come into a significant amount of money, or if you expect to do so sometime in the near future:

• Find out exactly how much you are going to receive and how and when it will be paid.
• Work with an accountant if you live in one of the states that still imposes inheritance taxes.
• Figure out where to park your money until you have determined a solid, long-term investment plan for it. Keep in mind that, even though the initial inheritance amount is federally tax-free, any investment gains will be taxable, unless you place the funds in tax-free investments.
• Take a look at your overall finances and savings to see if there are any financial needs that some of the money should be used for, whether short-term or long-term.
• Assess your retirement savings and see how much you should be investing, and what types of investments are wisest based on your age and current financial situation, so that you will be left with the best position for the future.
• Make sure you are adequately insured and have proper coverage for everything from life insurance and homeowners insurance, to long-term care.
• Determine if an umbrella liability insurance policy is worthwhile.
• Figure out any changes needed to your overall estate plan and whether there are steps you can take now, such as creating a trust or making gifts during your lifetime, to minimize any possible impact on your heirs.