How to Manage An Inheritance

Posted by Richard on February 4, 2014



Over half of American retirees expect to leave an inheritance for their loved ones, with an average value of more than $176,000.1 If you have recently received a bequest or are anticipating inheriting sizeable assets, now is the time to plan. Here are some tips to help you manage an inheritance.

• Wait and develop a strategy. Start by parking the money in the bank and take an inventory of your financial life. Are you on track for retirement? Do you have adequate insurance? Do you have significant debt? Are you supporting a family?

• Pay down your high-interest debt. Near the top of your priority list should be eliminating consumer debt, especially high-rate credit card debt. But think twice about paying off your mortgage, unless owning your home outright is an important goal for you. Your mortgage interest rate is likely low, and the money may be better used elsewhere. The same goes for paying off college loans at low interest rates.

• Save, save, save. Next step should be to turn to your savings, which may include funding an emergency fund of about six months’ living expenses, putting aside money for retirement, and setting up accounts for your childrens’ education and other life expenses.

• Don’t rush to spend. Ideally, the money should bring you closer to financial independence, but many heirs don’t know how to handle a windfall and end up no better off than they were before. Take small steps when making your decisions. Instead of quitting your job right away, consider working part-time. If thinking about purchasing a luxury sports car, try renting one first. The goal is to avoid making irrational decisions you might later regret.

• Do your research. If you’ve inherited a traditional IRA, research the options available before making changes. If you’re not a spouse, you can’t roll the inherited IRA into your own. Non- spouses are required to take taxable minimum distributions every year based on life expectancy. Instead of treating the distribution as an annual windfall to be spent, plan to integrate it into your long-term strategy.

• Find a suitable long-term investment strategy. Constructing a portfolio that generates passive income is the slow-and-steady approach that will lead to financial independence. To achieve stability and income growth, you’ll need to mix stocks and fixed-income investments, but don’t speculate by sinking it all into volatile equities or go too conservative by keeping it too heavily invested in cash or fixed-income securities. The point is to make the money work for you without unnecessary risk.

• Hire an expert. Managing an inheritance gets easier with professional financial help. Consulting a financial planner, investment professional, or tax accountant will help you maximize your current plan or help you develop a plan if you don’t have one. If you know you’ll inherit, you can begin planning ahead of time, but if the inheritance comes as a surprise, a professional can provide a better idea of your options. Be sure to get an objective opinion that is based on your entire financial picture and a thorough understanding of your goals.

This communication is not intended to be legal and/or tax advice and should not be treated as such. Each individual’s legal and/or tax situation is different. You should contact your legal and/or tax professional to discuss your personal situation.


1Source: HSBC, “The Future of Retirement: Life after work?” December 2013.


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