Here’s What to do if You Received an Inheritance Blog

Wealth Planning

June 30, 2021

5:12 min

Woman sitting at desk meeting with advisor

Receiving an inheritance from a past loved one can be stressful. Consider these tips when it comes to planning what to do with your inheritance.

  • Trust Accounts

This legal arrangement involves holding a third party's funds on behalf of another party, who may be an individual or a group. Trusts are created by grantors. In a trust, assets are usually distributed according to trust rules, and the investments are decided by the trustee. It is possible to receive the assets outright; however, it can also be possible to stay in trust and to be paid in installments.

    • Retirement Account

You can distribute funds within Roth IRA’s and 401(k)’s in one lump sum. There are requirements regarding the amount and frequency of distributions.

    • Real Estate

Real Estate can consist of property or a house. Property assets will be transferred to your name if you receive them. When you inherit real estate, you usually have the option of selling, renting, or moving into them.

  • Think before you spend

After inheriting money, many people tend to think about how they can spend it. Whether it’s a new car, a vacation, or new clothes, frivolous spending will make your new money disappear. Before getting carried away with the excitement, take the time to evaluate your financial situation. It will give you a better understanding of what you can spend, save, and invest.

A financial advisor can help you assess your financial situation and manage your wealth objectively. An advisor will help with financial and insurance planning, tax-advantage investing, portfolio management and much more.

  • Consider Taxes

You will need to consider taxes when deciding how to handle an inheritance. Being aware of tax ramifications is important and can affect your inheritance. There are inheritance and estate taxes imposed by several states in addition to federal estate taxes. Your inheritance can be taxed by the capital gains tax. Capital gains tax is levied on profits from property sales or investment. Your inheritance could also be taxed based on where you live.

To fully understand and feel comfortable when dealing with taxes for an inheritance, contact a tax professional or a financial advisor. Every situation is different, and it can be comforting to have a professional by your side.

  • Make a Plan

Creating a plan for your inheritance is similar to setting up a budget. Using your inheritance to help pursue your goals is a great purpose for funds. You may be able to start with the concepts of saving, spending, and giving if you consider your financial situation.

  1. Save:

    • Set aside money for big goals: 

      Paying it forward and boosting your savings goals is beneficial any time. With your inheritance, you may consider putting money toward a child's college fund or adding funds for your retirement. Use our handy calculator to help you decide if you should spend or invest in retirement.
    • Grow your emergency fund: 

      To help with unexpected expenses, you should have three to six months of living expenses saved. This makes it easier to be prepared for medical expenses, the loss of your job, or car repairs. When receiving an inheritance, it’s always a good idea to put some money into your emergency fund.
  2. Spend:

    • Minimize debt: 

      When deciding what to do with an inheritance, you may want to consider paying off high-interest debt. Spending money on debt repayment could save you a lot of money in interest charges.
    • Paying off or reducing your mortgage: 

      Consider using your inheritance to help pay down or fully pay off your home mortgage. By paying off a mortgage, you can significantly reduce your monthly expenses. Wondering if you should pay off your mortgage? Check out these pros and cons for paying off a mortgage.
    • Enjoy some of it: 

      Don't feel guilty about spending some of your inheritance on something you enjoy. Investing in your hobbies, planning a vacation, or getting more education are all great ways to enjoy your inheritance.
  3. Invest:

    • Invest in the stock market: 

      Most people will find that stock market investment provides long-term growth of their money. When doing so, it’s recommended to have a financial advisor help you invest your money in the stock market. A financial advisor is here to help you make an informed decision with your money.
    • Buy real estate: 

      Consider if real estate or owning rental properties is right for you. Owning and renting property can be a good source of income, but you’ll want to weigh the pros and cons. Evaluate legal obligations, determine your return, calculate operating expenses, as well as any unexpected expenses.
  4. Give:

    • Donate to charity: 

      Choosing the charity of your choice is a great way to give and honor your loved ones. If your loved one passed of a certain cause, donating to it respects their legacy greatly as well.
  • Meeting with a Financial Advisor to help with your plan:

Choosing the right advisor can help alleviate some of the stress caused by receiving an inheritance. It’s important to be sure your advisor has a similar investing philosophy as you. Here are a few tips on how to choose a financial advisor.

In the event of your loved one passing, receiving an inheritance can be stressful. Using these tips can help you manage them wisely. As always, if you have questions or if there’s any way we can assist you, contact us and we will be happy to assist you with your financial needs.


    4 Smart Things to Do When You Get an Inheritance, Discover

    What to Do With a Large Inheritance, Investopedia

    What to Do With an Inheritance, The Motley Fool

Investing involves risk of principal. No investment strategy can guarantee a profit or protect against a loss. This material is intended for informational purposes only, and should be relied upon when coordinated with specific individualized professional advice, as individual situations will vary. Neither LPL Financial, nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.
The information provided in these articles is intended for informational purposes only. It is not to be construed as the opinion of Central Bancompany, Inc., and/or its subsidiaries and does not imply endorsement or support of any of the mentioned information, products, services, or providers. All information presented is without any representation, guaranty, or warranty regarding the accuracy, relevance, or completeness of the information.

Category: Wealth Planning

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