What to Do with Inheritance Money
If you’ve received an inheritance or are waiting on one in the next few months, you may be thinking about what you will do with the inherited money. If it’s a significant amount, you’ll want to have a plan on how to spend your inheritance, how to save, and how to invest it for the future. Don’t be in a hurry to do something with money until you have a plan in place to ensure you get the maximum benefit from the money. Here are some tips on what to do with inheritance money once you have it.
Timeline for Getting Your Inheritance
Realize that it will be some time before you have access to your inheritance after the person has died. Even if you are the sole heir, you may need to go through a legal process known as probate before you are legally considered to be the owner of the estate.
The Probate Process
Probate can take several months because it must go through the county court where the decedent lived. The court oversees the handling of the estate to ensure the decedent’s wishes are honored as stated in their will. If there is no will, the court will abide by the statutes of the state where the decedent lived.
Before you can receive your inheritance, assets must be inventoried and appraised. Creditors must be paid and taxes filed and paid. The court will appoint an executor to manage the estate and distribute the assets.
Delays in the Process
Probate generally takes a minimum of six months and can often last as long as a year or two. Delays can lengthen the time until the assets are distributed to the heirs. Someone can contest the will, which will require a hearing for the court to decide if the will is valid.
Once all the steps are followed in probate, the executor will distribute the remaining assets to the heirs as directed by the will or by state law. They will transfer ownership by title for real estate, automobiles, and other assets. At this point, the heirs will receive their inheritance.
Consider Taxes First
If you expect to receive a significant amount for your inheritance, you’ll need to consider taxes first. Only a few states have their own estate taxes with Maryland being the only state for an estate tax and inheritance taxes. While state and federal estate taxes are paid out of the estate before the beneficiary receives the inheritance, other taxes are the responsibility of the heirs.
One tax to note is the inheritance tax, which is based on a percentage of the amount being inherited. Only six states impose an inheritance tax on the heirs:
Each state has its own requirements for how much you’ll pay and when it is imposed. Each state also has its own statutes for how long you have to pay inheritance taxes and if extensions are allowed. For this reason, you’ll want to calculate how much you need to pay and take it off the top of what you receive.
Capital Gains Tax
This is a tax on what you inherit after you sell it. You’re taxed on the amount of profit from the sale. This may not seem like a big deal if you sell the asset as soon as you get it but remember that the item was appraised for the value at the time of the estate owner’s death. If the estate sat in probate for a couple of years, the asset may have appreciated significantly during that time.
Distributions you take from a 401k or other retirement account could be subject to a tax. Real estate and investments may leave you with capital gains taxes when you sell. Before you plan on how to spend your inheritance, make sure you know what taxes you’re responsible for. You can talk to an estate attorney who will be able to advise you on which taxes you’ll need to pay and for how much.
Hire a Financial Advisor or Certified Financial Planner
Once you determine how much money you’ll need to pay taxes, you’re ready to think about what to do with the rest of the money. Depending on how much you’ve inherited, this can be quite intimidating. The last thing you want to do is squander it all and wake up one day with nothing.
A financial advisor can help you determine the best way to manage your inheritance. If they worked with the deceased person before, it’s even better. They know the accounts and what will work to multiply the money. One of the jobs of a certified financial planner or advisor is to provide sound investment options. They can direct you to stocks, bonds, or real estate as well as other options to improve your earnings.
Pay Off Debts
One of the best things you can do with your inheritance to give you peace of mind today and security for the future is to pay off current debts. Once you pay off auto loans, personal loans, student loans, and mortgages, the amount of income you need each month decreases. More of your future cash can go towards discretionary spending, or in other words – fun and provide financial freedom. If your inheritance isn’t large enough to cover all your debts, a certified financial planner can help you decide where it will do the most good. Paying off credit card debt and medical bills can have a positive impact on your credit and financial stability.
Paying off debt will help you save money by reducing interest. You can pay off the balance before more interest accrues, which would increase your debt.
With the money you have left, you’ll want to think about how to invest it in a smart way. Your financial advisor will help you know where to put your money to work for the biggest benefit. However, you should have an idea of your financial goals for the money before you meet with the advisor. Do you want to start earning some income off the money now?
Or do you want to create a solid retirement account for the future? Your financial goals and how long you want to invest will help determine the recommendations of the advisor.
For people who plan to continue working and don’t need the money, they can look at long-term investments. Others who need the money to improve their financial status now will have a focus on short-term investments. Everyone should start with an emergency fund to cover at least six months of expenses. An emergency fund is considered a basic for financial stability before looking at other investments.
Consider Your Goals in Life
Once you’ve figured out what to do with the bulk of your inheritance, now is the time to dream a little. Before you start splurging and shopping, think about dreams you’ve had that you can now make a reality. Maybe there was a career you wanted but couldn’t afford the education. Use your inheritance to pay for college.
Start that business you had already named back when you were a teenager. Perhaps you dreamed of buying and flipping houses; now you have the money to invest in such a venture.
Tips for Handling Your Inheritance
Here are a few suggestions on how to protect your inheritance and make the most of the money you’ve been given.
Insure Your Money
First, put money into an insured account. Not all financial instruments are insured, so consider setting some aside in a bank or other investment that is insured, especially for your retirement savings. With an FDIC or NCUA insurance account, it protects you up to $250,000. If you have more than that, you’ll want to spread it out to multiple accounts.
Consider Family and Friends
Consider setting up or adding to a college fund for your kids. College is often expensive, and your inheritance can take care of that for your children down the road with a college fund.
Be prepared to have a lot more friends once people learn you have an inheritance. They will ask for help or even a “loan” they probably won’t be able to pay back. Realize that it’s okay to turn people down. At the same time, you may want to give some to a charity you support. It can feel good to contribute to worthy causes once you’re at a financial point to do so.
Don’t Change Your Lifestyle
Don’t quit your job once you receive your inheritance. It can be tempting to give your two-week notice if you don’t like where you work, but you shouldn’t make a rash decision. Unless you inherit a massive amount of money, not working will ensure you go through it much faster. Instead, try to maintain your same lifestyle even after receiving your inheritance. Before spending your money on a major purchase, think about how much it will cost to upkeep that item. You’ll want to reserve money for maintenance or else you could end up poorer than before. For instance, expensive sports cars can be more costly to maintain and repair. A large house in an upscale neighborhood can also be expensive to keep up, especially if there are HOA fees and other dues.
Engage in Conscious Splurging of Your Inheritance
Once you’ve done the sensible thing with most of your inheritance, know that it’s okay to be a little frivolous with the rest. Buy that new car, go on a shopping spree for a new wardrobe, or find a place in the mountains or at the beach.
Just do your splurging in moderation. You don’t need to spend all your money in one day, one week, or even one year. Remember that the deceased person worked hard over a lifetime to gain that money. You may want to work to keep some to leave as an inheritance for the next generation.
Inheriting Other Assets
Up to now, we’ve assumed you inherited a large sum of cash. What happens if your inheritance is something more physical, such as real estate, jewelry, antiques, or a car?
If you inherited real estate, congratulations. No matter what is going on with the real estate market, real property is still the best investment. You have three options with such an asset. You can either sell it, rent it out, or live in it. Selling it will give you money right away, but don’t forget to plan for the capital gains tax.
Selling the Property
If the property needs a lot of work, you can either sell it as-is or fix it up to get a higher price. The decision may depend on how much cash you have on hand. There is a lot of work involved and costs can increase if you find more issues than you planned for. However, you can also end up with a significant profit. Many people get started in real estate investing with such a property, using the profit to buy another property.
Renting Out the Property
If you decide to turn it into rental property, you’ll have a regular income each month. Just make sure you put some aside for maintenance and repairs to the property. You also want to choose the right renter to avoid problems with tenants not paying or damaging the property.
Living in the Home
With your third option of living in the home, make sure you can afford the costs involved. Can you pay the utilities, insurance, and maintenance costs? If you also received cash in your inheritance, you may want to allocate some of it for the home expenses. Otherwise, your income will need to cover them.
Other Assets in Your Inheritance
Any other assets you inherit may be more complicated to decide what to do. Cars, antiques and jewelry can all be sold, but you need to know what they are worth and how to find the right buyer. If you have something like your dad’s baseball card collection or comic book collection, you’ll want to find a buyer who knows the value and appreciates what they are getting. It can take months to sort through things and determine what has value. Unless you’re an antiques expert, you may not realize that a dusty old cabinet is worth thousands of dollars or a dingy set of dinnerware is an antique.
If you have a lot of these kinds of items, it may be in your best interest to hire an auction house that specializes in estates. They will take a percentage of the selling price, but they will also work to get the most money from the items. It can save you a lot of time and allow you to focus on other aspects of your loss.
Remember There’s No Hurry
Perhaps the most important thing to remember when you inherit from a loved one is you don’t have to make decisions right away. Secure physical assets, put inherited cash into a money market account, and take some time to process the situation. The decisions you make can impact the rest of your life and your family as well, so don’t be in a hurry.
If you’ve received an inheritance or know you will, find a team to work with to help you in these decisions, starting with an estate planning attorney and certified public accountant. Work with the experts who will have your interests in mind and honor your loved one’s legacy while providing for your own future and that of your heirs with your newfound wealth.