You Just Inherited Money. Now What?

You Just Inherited Money. Now What?

Receiving an inheritance leads to a host of important financial decisions, as the Baby-Boomer and Generation X cohorts are about to discover. “Many people in their 50s and 60s are inheriting now or soon will”, says Elizabeth S. Larson, CFA, senior wealth advisor and principal at Evermay Wealth Management in Arlington, VA.

An inheritance can be an unexpected financial windfall but may come at a time when you’re navigating a complex emotional landscape. “Grief is a powerful factor,” says Larson. “It can definitely muddy your financial thinking because of the emotions involved.” 

Wait a Beat

That’s why the essential first step when receiving an inheritance, says Larson, is a degree of inaction: “Don’t make significant changes right away,” she advises. “Wait six to twelve months. That may seem like a long time, but it’s not long in the world of estate settlements which can take up to a year to complete – and sometimes longer if the decedent owned investment real estate or a private business.”

Financial assets are typically held in an estate account at a bank or brokerage firm before distribution. Oftentimes a home needs to be sold and an estate tax return filed, adding to the time involved. Larson advises, “Talk to an estate or tax professional to be sure, but you should be able to take some time to evaluate it all.”

Assess the New Assets

If a home constitutes part of the inheritance, you’ll need time to distribute its contents. “We’re not advising to leave a house vacant, but in some markets, it may not be easy to sell quickly,” Larson says. While many of the possessions in the house may be of sentimental value and simply need to be divided among family members, she advises hiring an appraiser to conduct a formal valuation for the rest.

There is a time to take relatively quick action, however, if you inherit a large amount of a single stock that will constitute a major portion of your financial wealth, exposing you to risk. “You may want to thoughtfully reduce that overweighted position,” says Larson. “It’s important to address it, but perhaps 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 above-market interest rates, or student loan debt. “Consider paying off or significantly paying down any debt other than a mortgage,” says Larson.

As for the rest, Larson takes a philosophical approach. “Inheritances are not something that any of us really deserve, or that we earned, or that we worked and strived for. They are fruits of someone else’s labor. That is why many beneficiaries are drawn to stewardship of their inherited assets.

Think of Your Future and Legacy

If you think of yourself as a steward of the family’s wealth for future generations, it can help you prioritize how to invest your inheritance. “It’s a lump sum, and often comes at a point in life when there are a lot of pulls on you financially, such as paying for children’s education and saving for retirement,” Larson points out. “Beneficiaries would be best served taking their inheritance and designating a significant portion of it to the things that keep them up at night, such as ‘How am I going to retire?’ Or ‘How am I going to pay college tuition?’”

An inheritance is often helpful in boosting your retirement savings – a chance that may not come again. “It’s an opportunity to reset the clock, especially if you’ve under-saved,” says Larson. “An inheritance can do a lot toward making one’s retirement more comfortable.”

Have Fun!

Once you’ve devoted a fair share of an inheritance to wise investing, there should 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 including insurance, maintenance and property tax. These are lifestyle expenditures that require more spending going forward,” Larson says.

But a family vacation or the celebration of important life events might just be worth it. “Creating memories is a very important part of life,” says Larson. And, it has been shown time and time again that spending on experiences makes people happier than spending on things. “It’s a balancing act. You should allow yourself some pleasures. That’s what a richer life is all about!”

Blog commentary and opinions expressed herein represent a snapshot in time and are subject to change. Any discussion or information contained in this blog does not serve as the receipt of, or substitute for, personalized investment advice from Evermay. The above article is an update to a previous Evermay Wealth blog post by Julie Anne Russell, a Brooklyn-based freelance journalist.