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I’ve always said that you should dream about winning the lottery. While it is an extremely long shot to win the lottery, it isn’t that far fetched to receive a lump sum as an inheritance. Many people are often expecting or have already received an inheritance, even if it is a meager one of $5,000 or in the millions. But, do you know what to do with an inheritance?
But, what do you do when you come into a large sum of money or highly valued assets thanks to an inheritance? There are several steps that you should consider taking when you receive an inheritance. Here are just a few things to consider when you receive a large sum of money through an inheritance, a bonus from work, or even winning the lottery.
What to Do With an Inheritance You Receive
Understand the Terms of the Inheritance
In many cases, inheritances aren’t cut and dry where you receive a lump sum of money. There can often be stipulations, time limits, age limits, and steady drips of funds.
It all depends on how the deceased set up their last will and testament and what it says. This is why it is important that you understand the terms of any inheritance that you receive.
There can be many strings attached to receiving an inheritance. For example, your loved one could set up an inheritance with monthly dividend payments. But, you can’t access the full amount of money until you reach a certain age.
Elvis Presley actually had this build into his will. He left all of his assets and money in trust to his daughter, Lisa Marie, who was only nine years old at the time. Elvis’ will stated that she could receive the entire amount when she reached the age of 25. Lisa Marie actually decided to wait until much later before she took over Elvis Presley Enterprises and Graceland.
Some times there areinterestingstipulations that you must follow in order to receive your inheritance. The stipulations can range from completing a Bachelor’s Degree to creating an endowment for their favorite charity and many others.
Determine Your Inheritance Tax Liability
Only 8 US states levy an inheritance tax, but there are different rates for different monetary amounts. So, it’s important to figure out what your potential tax burden might be before spending all of it or locking it into long-term investments.
It often pays off in the end for you to hire a financial planner, tax professional, or a lawyer to help you navigate the waters of an inheritance. You should build a team of financial professionals around you that you trust to advise you after receiving a large sum of money.
You should consider hiring a certified financial planner (CFP), a certified public accountant (CPA), a lawyer, and other professionals to help you. This is especially true if your inheritance is sizeable or has any confusing clauses in it.
Pay Off Your Debts
Paying off your debt is like earning a rate of return on an investment. You can consider the interest that you would have paid on your debt like the rate of return you would have earned on an investment.
You should try to pay off at least a portion of your debts assuming that you have more debt than inheritance funds you receive. And, you should focus on the high interest debts like car loans, credit cards, student loans, and others first. Or, you can look at creating a debt snowball, which tackles the smallest balances first with your inheritance.
Invest in Assets
All too often, people use their inheritances to buy a new car, boat, or fund their expensive hobby. It is easy to view the money as “found money” or money that you never considered or factored into your family’s overall financial plan.
If you consider an inheritance in this way, you can quickly see the money disappear as fast as you received it. A safer bet would be to invest a chunk of this money into an asset that will not depreciate like an IRA account, mutual funds, or a new home.
It isn’t that far fetched to receive a lump sum as an inheritance at least some point in your life. Many people often receive some type of an inheritance from a loved one. Even if it is a small inheritance, you can make the money last longer and put it to good use with a little careful planning and consideration.
Have you ever received an inheritance? Do you know what to do with an inheritance once you receive it? Did you have the right team in place to help you?
