It can feel really overwhelming to come into an inheritance. You’ve gone from losing someone that you were close with to gaining a large sum of money in a very short time period. So what should you do? Here are a few tips for navigating a new inheritance.
Take some time & assemble a team
When a loved one passes, there can be a lot to process. You’re mourning, planning a funeral, and figuring out what to do next. Take your time. It’s better to be deliberate while you collect yourself rather than making a financial decision you’ll later want to reverse.
You also may want to enlist some professionals to help you create a plan for managing your inheritance. You’ll likely want to work with a financial advisor, a CPA (certified public accountant) or tax attorney, and potentially even an estate planning attorney.
Understand the tax situation
Before moving any money, you’ll want to make sure you understand what taxes this money will be subject to. Pay specific attention to estate taxes and inheritance taxes. The threshold for a federally taxable estate went up to $11.4 million in 2019 per individual (or $22.8M for a married couple), though some states also have an estate tax and in Massachusetts the threshold is only $1 million. Some states also apply inheritance taxes, which must be paid by the beneficiary (you).
Consider your financial goals
Chances are you may have started to think through your financial objectives before coming into this money. While it’s normal to feel tempted to treat this money like a windfall, you’ll want to be smart about how to manage this money -- just as you would any other money. Some things to consider:
Pay off existing debt - You can use your inheritance to pay off any existing debt or pay down your mortgage to reduce ongoing interest costs.
Build an emergency fund - It’s always important (but not always feasible) to have close to six months’ worth of living expenses saved in case you have an employment gap or run into any large unplanned expenses. If this isn’t something you currently have, it may be worth considering putting some money aside for your rainy-day fund.
Invest - Whether you’re planning on sending your kids to college or just want to save for your own retirement, working with a professional to invest your inheritance is a great option. You’ll be able to optimize how your money is invested and implement a plan to start achieving your financial goals.
Have some fun - Of course, it’s okay to set aside a small part of your inheritance to enjoy it. Just be sure not to lose sight of your long-term goals.
The bottom line
There’s a lot to consider when you’re figuring out what to do with an inheritance. Don’t be shy to talk to a financial advisor who can help you sort things out. Paceline is always here to help. For a free, no-obligation consultation, please contact us.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.