Receiving an inheritance leads to a host of important financial decisions, as the baby-boomer generation is about to discover. Many people in their 50s and 60s are inheriting now or will soon, says Elizabeth S. Larson, CFA, senior wealth advisor and principal at Evermay Wealth Management in Arlington, VA. Baby boomers are poised for a $27 trillion wealth transfer as they pass their money to the next generations over the next several decades.
Inheritance can be a financial boon, but comes at a time when you’re navigating a complex emotional landscape. “Grief itself can be a powerful factor,” says Larson. “It can definitely muddy your financial thinking, because of the emotions involved.”
Wait a Beat
Which is why the essential first step when receiving an inheritance, says Larson, is actually a degree of inaction: “Don’t make any significant changes right away,” she advises. “Wait six to 12 months. It may seem long, but it’s not in the scheme of estate settlements.”
By taking a break and stepping back for a bit, you’re able to deal with the funeral and grieving process, she says. And more practically, it simply takes many months to settle an estate. “Assets will be in an estate account for a period of time before they are distributed,” she says. “It can take awhile to actually find out the value of the assets, to sell a home, and to a do an estate tax return.” Talk to an estate or tax professional to be sure, but you should be able to take time to evaluate it all. Then, you can then take a look at what is left and go about distributing assets, she says.
Assess the New Assets
If a home does constitute part of the inheritance, you’ll need time to empty it. “Selling can’t happen until you distribute the contents of the house, and there’s an emotional element to that. It could take months or more. I’m not advising to leave a house vacant, but it’s unusual that you’d be able to sell it very quickly,” Larson says. While some of the possessions in the house may be purely of sentimental value and simply need to be divvied amongst the family, she advises hiring an appraiser to do a valuation for the rest.
There is a time to take relatively quick action, however, and that’s if you inherit a large amount of a single stock and it will now constitute a major portion of your portfolio—exposing you to risk. “You want to thoughtfully reduce that overweighted position,” says Larson. “It’s important to address it, but don’t wholesale sell everything.” Rather, Larson says, take a methodical approach over the course of months until that stock is less than 10% of your portfolio.
Tackle Your Own Finances
Next up would be to pay off credit card balances that you’re carrying month to month, car loans at market rate, or student loan debt. “Anything other than a mortgage, consider paying off or paying down significantly,” says Larson.
As for the rest, Larson takes a philosophical approach. “Inheritances are not something that any of us deserve, or that we earned, or that we worked and strived for,” Larson says. “They are fruits of somebody else’s labor. And there is a very strong part of me that believes that with a sizable inheritance, you need to think about stewardship.”
Think of Your Future and Legacy
If you think of yourself as a steward of the family’s wealth—which can be carried forward for generations if handled properly—it can help you prioritize how to invest your inheritance. “It’s a lump sum, and it comes at a point in life, usually, where there are a lot of pulls on you financially, such as raising children, and mortgages,” Larson points out. “If I could, I’d convince people to take that money and use it not for the fun things but for the things that keep them up at night—how am I going to retire, how am I going to pay for education?”
An inheritance might be critically helpful in boosting your retirement savings—a chance that may not come again. “It’s an opportunity to reset the clock a little on what you have saved, if you’ve undersaved,” says Larson. “An inheritance can do an awful lot toward making the next generation’s retirement a lot more comfortable.”
Once you’ve devoted the lion’s share of an inheritance to such wise investing, there may be room for a little fun—but splurge wisely. Larson cautions against big-ticket expenditures on luxury items. Purchases such as expensive cars and boats have additional costs like insurance, maintenance and property tax. “Those are lifestyle issues that require more spending going forward,” Larson says.
But a family vacation might just be worth it. “Creating memories is a very important part of life,” says Larson. And spending on experiences, it’s proven time and time again, makes people happier than spending on things. “It’s a balancing act,” says Larson. “You should allow yourself to do something, that’s what life is all about.”
Julie Anne Russell is a Brooklyn-based freelance journalist. She writes on personal finance, small business, travel and more.
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