Gratitude. Confusion. Excitement. Grief. If you have recently received an inheritance, you may be feeling all these emotions and more.
Your feelings are perfectly natural. You are dealing with the loss of someone you love and trying to decide the best use for your inheritance. But be aware that at times like these, inheritance mistakes can be easy to make.
Our wealth management firm in Plantation, Florida, has seen five common errors that we share below. We hope this article helps you avoid the same mistakes so you can create a thoughtful plan for your inheritance that helps increase your long-term financial security.
1. Making Financial Decisions Too Soon
We generally advise that people who have received an inheritance postpone decisions about their money. Rather, they should give themselves time to process their grief.
It can be challenging to understand your options if you are hurting. So take some time to heal. When you are ready, you can start making a plan for your inheritance.
2. Spending the Inheritance Too Quickly
We’ve all heard of lottery winners who blew through their winnings and ended up with nothing. Whether it’s a lottery win, an inheritance, or any other financial windfall, a sudden infusion of cash can make our heads spin with possibilities.
Suddenly, we can make our long-held dreams come true. And the result may be that in our excitement, we mindlessly spend through our new fortune and put ourselves in a worse place than before.
It’s important to take a big-picture view of your finances right now. We generally advise that people set goals for their money that include:
Paying off high-interest-rate debt, such as credit cards
Creating an emergency fund
Building a retirement plan
Implementing a diversified portfolio over time
And because money can help enrich our life experiences, you might include funding a big-ticket dream, such as a globe-trotting vacation (after the pandemic, of course).
By giving yourself goals, you provide a framework for your money and may be less prone to make off-the-cuff decisions that hurt your personal finances.
3. Failing to Set Boundaries with Your Money
Depending on the size of your inheritance, you may see a few or many “long-lost cousins” asking for your help. You will probably come up with all kinds of ideas for making life easier for immediate family members and friends. Charitable organizations will approach you for worthy causes. And you could, unfortunately, be the target for lawsuits.
It is a beautiful impulse to want to help other people, but it shouldn’t come at your detriment. When you set goals for your money, you can include philanthropy in your budget, apportioning a set amount for that objective.
Also consider strategies such as umbrella liability insurance or certain trusts to help shield your wealth against lawsuits. Our fiduciary financial advisory firm includes risk analysis as part of the comprehensive financial planning we provide.
4. Not Understanding the Rules for IRAs
If you inherited a retirement account such as an IRA, take the time to understand the rules. It used to be that if you inherited an IRA, you could stretch out the distributions over your lifetime. However, the passage of the SECURE Act in late 2019 eliminated the stretch IRA for many people.
If you have inherited an IRA in 2020 or after, you will need to empty the account within 10 years unless you are:
A spouse of the deceased
A minor child (the 10-year rule begins once you reach the age of majority)
Chronically ill or disabled
Less than 10 years younger than the deceased IRA owner (such as a sibling)
If you meet one of these exemptions, you have the option to take RMDs based on your life expectancy.
5. Trying to Do It on Your Own
The larger the inheritance, the more critical it is to work with a team of professionals. By doing so, you surround yourself with people who can help you make long-term plans for your money, provide an objective perspective, serve as your fiduciary, and keep you on track.
Depending on your situation, you can plan on assembling a team including:
Financial advisor
Tax professional (e.g., CPA)
Estate planning attorney
Ideally, your financial advisor will serve as a hub for the team, coordinating with your other professionals as needed. We generally recommend that people seek out a fee-only, fiduciary financial advisor to provide advice in their best interest.
Final Thoughts
Many people end up misspending their inheritance—but that doesn’t have to be you. Before you begin spending your loved one’s gift, make sure you are in an emotionally healthy space. Then set goals for your money so that you avoid rash spending that ends up hurting you.
Also make sure you understand the rules for assets such as IRAs, and resolve to help others responsibly. Finally, with a team at your side, you will be in a better position to avoid mistakes and make decisions that benefit your long-term financial well-being.
Schedule a complimentary consultation with one of our fee-only financial planners to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.