Unexpected Inheritance…Now What?

Beloved Aunt Millie dies and leaves you some cash. Now what? How about a new house? Do you rush out and buy that new car? Unfortunately, a new car is often on the top of the list of purchases.

I am often surprised at the lack of forethought that goes into the decision making process of most Americans when it comes to windfall income.  In a recent study conducted by Jay Zagorsky, a research scientist at Ohio State University, data showed that folks who receive inheritance funds only save half of what they receive.

Hopefully, I can clear the air as how to proceed when you are blessed with preverbal mail box money.

Remember to plug it into your plan

Often people forget to coordinate with their overall financial goals and plans when it comes to windfall income. Including additional income into a holistic (comprehensive) view is a must.  Just because the income fell into your lap it should not mean it is money simply to blow. Put the money to use where it makes the most sense.  One of the best ways to determine if your decision makes sense is to follow the Five Fundamentals of Financial Success.

Invest wisely

It happens more often than it should: someone loses most of an inheritance to bad investments.  This dreadful occurrence usually stems from a false sense of security with the new found funds.  Investing inheritance money should be done with the same level of due diligence and care as every dollar you earn…..sometimes even more carefully.

Create Tax Efficiency

This is one of my favorite areas in which to help clients. Since taxes are usually the largest recurring expense we face, we should certainly focus on ways to save tax dollars…..even when it comes to receiving an inheritance.  One simple method is to max out retirement contributions.  Using the proceeds from the inheritance to fill in cash flow needs while you max out a 401k/403b or IRA is a real home run.  For example, a couple putting an additional $10k into a retirement account could save as much $3500!  That’s a 35% return before the money even gets invested.

Think about Charity

I know it may seem hard to believe, but sometimes there are those who are lucky enough to not need additional assets. These folks are in the unique position to give large chunks to charities. But, even for those who aren’t wealthy, charitable giving can make a lot of sense. It can possibly be a testament to the decedent and continue a legacy of caring. It can also be another way to save tax dollars, but remember there are tax rules as to how much is allowable to give, while still receiving a tax deduction.

Sit Tight

One of the most common mistakes with windfall income is hasty choices. Decisions made without proper forethought can be dangerous.  Sitting tight and giving time to fully understand the consequences of any financial decision will be a benefit.

Get Help

When a gift, inheritance, life insurance proceeds, lottery winnings, or other form of windfall income becomes substantial, it’s wise to enlist help.  As a fee-only advisor, I am a big fan of unbiased advice. I feel working with a fee-only advisor is a great first step.

About the author

Troy Von Haefen, CFP®
Troy Von Haefen, CFP®

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