Do you know what to do when a loved one passes, and you find out that you're receiving an inheritance? A Federal Reserve Board's survey of consumer finances states that an average of roughly 1.7 million households receive an inheritance each year.
Yes, newfound wealth has its advantages. But you need to think twice. According to a study funded by the Bureau of Labor Statistics, one-third of people who receive an inheritance spend all of it—and even dip into other savings—in the first two years. What's the smart thing to do? Since an inheritance can cause both emotional and financial issues, here are some pointers that will make the process a lot simpler.
Take It Slow
When a loved one dies, you might feel overwhelmed. You may not be thinking clearly enough to make major financial decisions. On the plus side, in most cases, you don't have to make any major decisions right away, as generally, it takes time for estates to be settled. The whole process can take several months, or even more than a year.
Keep calm, take a step back and evaluate your options before you make any decisions. There is nothing wrong with letting your inheritance sit there for a while as you grieve.
Understand Your New Assets
Inheritances can be distributed in many forms, so it's important to know what you're getting. It can be distributed through various asset types, such as retirement plans, stocks and bonds, life insurance, cash endowments, businesses or real estate.
Once you know the final value of the inheritance, then it's possible to start thinking ahead. Click here to get help analyzing your new assets.
Plan out Your Goals
A big part of how you handle an inheritance will be determined by your own financial situation. Just like doing your household budgeting, it's important to designate your inheritance to specific purposes or objectives. To figure out how to best deploy those dollars, this is a time where you can fulfill some of your lifestyle goals or accomplish something practical or helpful for friends or family.
Here are the most common things people do with inheritance money:
Tap Into Experts
Taxes surrounding an inheritance can be complicated, and you may owe taxes on your newfound assets. Once you have a good idea of the size and type of assets that you'll inherit, you can have a constructive conversation with your tax planner, CPA or certified financial planner about whether you'll owe any taxes when you receive them. Tap into the experts so they can help audit your current assets and liabilities—including taxes, debts, income, spending, and property—as well as your future financial objectives.
The more you can do in advance, the less likely you'll be blindsided when the inheritance arrives and the stakes are higher.
Evaluate Insurance Coverages
If you have new wealth due to an inheritance, or you inherit the home of a family member, be sure to check the status of the homeowners insurance policy. Leaving the home uninsured leaves you susceptible to any damage (such as a storm) and could cost you a great deal to repair it.
In addition, this is a good time to assess your circumstances and explore your protection options. You may want to consider reviewing your current life insurance needs with your financial advisor.
Update your Will
Whether you've received an inheritance or not, you should revise your will any time your financial or family circumstances change.
Summing it up
Most of us are used to gradual earnings through our lifetimes. The responsibility of a sudden arrival of a large sum of money can push you out of your comfort zone, and thrust you unprepared into some big decisions. Follow the tips above to stay organized ahead of the situation at hand, and to avoid financial anxiety.
Resources: MoneyUnder30, BankersTrust.com, Probate Advance, Ameriprise.com, CNBC
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