Inheriting a large sum of money is an unusual financial situation — you’re suddenly much wealthier than you were before, but you didn’t work for that money or come by it intentionally, as with selling a business. Depending on the circumstances, you might not have even known it was coming.
The next question is what to do with the inheritance. Do you use it to pay off your debts? Save it for the future? Blow it on vacations and cars? It’s your money, so the choice is ultimately yours, but it’s worth doing some careful planning before you get carried away.
Take a Time Out
Before you do anything else, take a deep breath. Sorting through a will, probate, and figuring out which assets you have on hand can take a while. It could be years before you know exactly what you’re getting, what it’s all worth, and what you can do with it. Make a commitment not to spend a penny of it until you have your ducks in a row.
Hire the Right People
There’s a reason that lottery winners are more likely to go broke than the average person — it’s easier to blow through a lot of money than you think. Not all inheritances take the form of a check (more on that later), but the point stands that it’s better to be cautious than reckless.
To that end, it’s a good idea to employ the services of a few different people that can help you sort through the financial implications of your inheritance:
- A tax accountant: there can be a lot of tax implications to an inheritance that you might not have thought of. Depending on how it was structured, you might owe inheritance or estate tax that will come out of the total amount of the inheritance. If you inherit a house, you’ll have to start paying property taxes. If you inherit stocks that you want to sell, you’ll have to take capital gains tax into account. Hiring a professional to make sure you don’t miss anything or pay more in tax than you have to is a prudent step.
- An attorney: also called a probate lawyer or inheritance attorney, you might need the help of an attorney to navigate the transfer of assets. In the event of a contested will, such as between siblings, bringing in a legal expert is the best way to keep things above board. An attorney can also be useful if the estate includes something that requires ongoing management like a trust, a business, or commercial real estate.
- A financial planner: once the dust settles and you know exactly how much money you’re working with, you’ll want to know how to use that money to achieve your goals. Should you pay off debts immediately or over time? Should you put the money in savings or invest it? An experienced financial planner can help steer you in the right direction.
What Did You Inherit?
One major step is to take stock of exactly what you inherited. Large inheritances rarely take the form of a check with a lot of zeroes in it, deposited directly into your bank account — there will be a mix of assets, and you might have to treat them differently:
- Cash: This is the easy one. You can deposit it, spend it, invest it, or whatever else takes your fancy. Just take a second to think about taxes first — if you’re going to owe tax on some other part of the inheritance, your cash is probably the best way to pay them.
- Trusts: There are a lot of different kinds of trust, each with their own structures and rules. You can sort out the details with your lawyer, but the important thing to remember is that just because you’ve been bequeathed a trust doesn’t mean you’re in charge of it — every trust has a trustee, and that might not be you.
- Retirement accounts: if your spouse leaves you their IRA or 401(k), you can easily put them in your name and take a lump-sum payout, though you might have to pay income tax on that money. If you’re not the spouse, your options are more limited.
- Property: inheriting a house comes with its own hurdles. You’ll start owing property taxes on the house once it’s in your name, so you’ll have to make a decision about whether to keep and maintain it or sell it — but selling a house that you haven’t owned for very long has tax implications of its own.
Be Careful With Gifts
When people find out that you’ve recently come into a lot of money, they’re going to ask you for it. Be prepared for family and friends to come to you with problems and requests that they want you to solve, and be willing to take a firm stance if that’s the case.
In rare cases, you can even be sued for the money you inherited. For example, a parent is under no obligation to split their estate evenly between their children, and some choose not to. If one sibling feels short-changed, they might sue the other for their “fair share.” This is why it’s so important to consult with a lawyer to make sure your money is protected before you start handing out favors.
Assess Your Financial Goals
It’s never too early to start thinking about your long-term goals, and a large inheritance can jump-start a lot of those goals for you. Do you want to buy a house (or a second or third)? Do you want to retire earlier, or more comfortably than you thought you’d be able to? Do you want to set aside money for your kids or grandkids to go to college? Do you want to use your newfound wealth to support a startup or a charity? Now is the time to think about how your inherited wealth can accelerate your goals.
Different assets might help more or less with different goals. Cash can be used to buy a house right now, whereas a brokerage account is probably better set aside for college or retirement. At First Western Trust Bank, we know that every financial situation is unique. While large banks tend to pigeonhole their customers into categories based on age and income, our team of experienced advisors can create a financial plan that’s unique to your situation, your priorities, and your values. Get in touch today, and we’ll help you find the right path.