Broker Check

What Should I Do When I Inherit Money?

| December 23, 2016
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Evaluate Your New Financial Position

Before you spend or give away any money or assets, decide to move, or leave your job, you should do a cash flow analysis and determine your net worth as a first step toward planning your financial strategy.

Determine Your Short-term and Long-term Needs and Goals

Once you've done a cash flow analysis, you need to evaluate your short-term and long-term needs and goals. For example, in the short term, you may want to pay off consumer debt such as high-interest loans or credit cards. Your long-term planning needs and goals may be more complex. You may want to fund your child's college education, put more money into a retirement account, invest, plan to minimize taxes, or travel.

Use the following questions to begin evaluating your financial needs and goals, then seek advice on implementing your own financial strategy:

  • Do you have outstanding consumer debt that you would like to pay off?
  • Do you have children you need to put through college?
  • Do you need to bolster your retirement savings?
  • Do you want to buy a home?
  • Are there charities that are important to you and whom you wish to benefit?
  • Would you like to give money to your friends and family?
  • Do you need more income currently?
  • Do you need to find ways to minimize income and estate taxes?

Invest Wisely

Inheriting an estate can completely change your investment strategy. You will need to figure out what to do with your new assets. In doing so, you'll need to ask yourself several questions:

  • Are your investments growing enough to keep up with or beat inflation?
  • Will you have enough money to meet your retirement needs and other long-term goals?
  • What is your tolerance for risk? All investments carry some risk, including the potential loss of principal, but some carry more than others. How well can you handle market ups and downs? Are you willing to accept a higher degree of risk in exchange for the opportunity to earn a higher rate of return?
  • How diversified are your investments? Because asset classes often perform differently from one another in a given market situation, spreading your assets across a variety of investments such as stocks, bonds, and cash alternatives, has the potential to help reduce your overall risk. Ideally, a decline in one type of asset will be at least partially offset by a gain in another, though diversification can't guarantee a profit or eliminate the possibility of market loss.

Once you've considered these questions, you can formulate a new investment strategy. However, if you've just inherited money, remember that there's no rush. If you want to let your head clear, put your funds in an accessible interest-bearing account such as a savings account, money market account, or a short-term certificate of deposit until you can make a wise decision with the help of advisors.

Decide if You Want to Give Gifts

Once you claim your inheritance, you may want to give gifts of cash or property to your children, friends, or other family members. Or, they may come to you asking for a loan or a cash gift. It's a good idea to wait until you've come up with a financial plan before giving or lending money to anyone, even family members. If you decide to loan money, make sure that the loan agreement is in writing to protect your legal rights to seek repayment and to avoid hurt feelings down the road, even if this is uncomfortable. If you end up forgiving the debt, you may owe gift taxes on the transaction. Gift taxes may also affect you if you give someone a gift of money or property or a loan with a below-market interest rate. The general rule for federal gift tax purposes is that you can give a certain amount ($14,000 in 2016) each calendar year to an unlimited number of individuals without incurring any tax liability. If you're married, you and your spouse can make a split gift, doubling the annual gift tax exclusion amount (to $28,000) per recipient per year without incurring tax liability, as long as all requirements are met. Giving gifts to individuals can also be a useful estate planning strategy.

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