Managing Your Newfound Wealth Through an Inheritance
Receiving an inheritance can be both a significant and emotional event. To ensure you make the most of this windfall while minimizing risks and tax burdens, follow these seven key steps.
1. Assess Your Inheritance and Current Financial Situation
Begin by listing all inherited assets—real estate, investments, retirement accounts, and other valuables—along with any liabilities you may have. This comprehensive overview will provide a solid foundation for your decision-making process.
2. Address Immediate Financial Needs
Pay off high-interest debts, build an emergency fund, and review insurance coverage to stabilize your finances before investing or spending. A prudent initial step is to set aside about one year's living expenses in safe, liquid accounts before making major investment or spending decisions.
3. Plan Thoughtfully for Taxes
Consult a tax professional to understand tax implications like income tax on inherited retirement accounts, capital gains tax on sold inherited property, and possible estate or inheritance taxes, which vary by state and asset type. The SECURE Act of 2019 changed rules for inherited IRAs, with non-spouse heirs now generally required to deplete inherited IRAs within 10 years, potentially incurring income taxes on withdrawals. Spouses have more flexible options including rolling over funds to their own IRA.
4. Develop a Long-term Financial Plan
Decide whether to save, invest conservatively, or fund specific goals such as retirement, education, or a home purchase. Keeping most of the windfall in low-risk or FDIC-insured investments initially can help preserve capital while you plan.
5. Work with a Qualified Financial Advisor and Tax Expert
Seek personalized advice tailored to your financial goals, risk tolerance, and tax situation. Advisors can help update your estate planning documents—wills, trusts, powers of attorney, and beneficiary designations—to reflect your new net worth and intentions.
6. Update Your Own Estate Plan
Use this windfall as an opportunity to review and revise your will, trusts, beneficiary designations, and other estate planning instruments to secure your family's financial future.
7. Enjoy the Windfall Responsibly
Balance immediate gratification with long-term security. Avoid impulsive spending; instead, align your decisions with your values and priorities to preserve and grow the inheritance for lasting benefit.
For smaller inheritances, consider setting aside 10% for fun money. For larger inheritances, a specific figure can be set for spending on long-desired items. A good financial advisor or tax advisor can confirm if these taxes apply and help navigate the tax laws.
By following this structured approach—careful assessment, tax planning, professional guidance, and thoughtful financial alignment—you can maximize the benefit of your inheritance while minimizing risks and tax burdens.
- The inherited retirement accounts, real estate, investments, and valuables should be compared to evaluate their potential for growth and tax implications in a comprehensive financial plan.
- To ensure financial stability, it's advisable to invest in businesses or personal-finance apps that offer high returns while maintaining savings for unexpected expenses and carrying low-interest debts.
- Seeking the advice of a financial advisor and tax expert can help make informed decisions about investing, saving, and paying taxes on the inheritance to optimize wealth growth.
- By understanding the rules of inherited IRAs, one can avoid unnecessary taxes and make the most of the inherited wealth for long-term financial goals such as retirement.
- To secure the financial future of family members, it's crucial to update estate planning documents and collate essential financial information in one place, like banking details, investment accounts, and insurance policies.
- Balancing immediate spending desires with long-term financial security means setting aside a portion of the inheritance for enjoyment and the remainder for saving, investing, or funding specific goals like education or a business.
