Of all the moments in life, losing a parent is one of the hardest. However, receiving an inheritance more than ten times bigger than you expected presents an entirely different series of issues. Did you know that Americans receive over $427 billion a year of inheritance, but close to one-half of significant windfalls are spent or lost within five years?
After receiving a life-changing inheritance like mine, how do you use it wisely, preserve your future, and respect the family legacy? Here are 17 meaningful things I’m taking very seriously.
Consult a Certified Financial Planner (CFP)
Advice from experienced players can change your financial track. Having a CFP will assist in creating a goals map, risk tolerance assessment, and a diversified wealth management plan for you. Financially independent twice as often as households that do not, said the CFP Board — and using certified advisors makes households feel more confident.
A planner can clarify an inheritance’s tax implications and recommend moves to enhance the returns. For peace of mind, look for a fiduciary who must operate in your best interest; check their credentials online.
Pay Off High-Interest Debt
Paying off high-interest credit card or loan debt yields a guaranteed return of over 20%. According to the Federal Reserve, the typical American household has approximately $8,000 of credit card debt with an interest rate exceeding 21%. Removing these balances immediately liberates future income that can be saved and used more effectively.
The math involved in reducing debt isn’t everything. It gives you freedom and flexibility, helping you hone your financial habits. It also helps your credit score, making you ready for future opportunities.
Build an Emergency Fund
Another reason to start a high-yield savings account is the low risk of having your account access denied or restricted. Financial planners recommend setting aside three to six months’ expenses in a high-yield savings account. An emergency fund is a lifeline to the average American, who can expect an unexpected $1,400 yearly expense (Bankrate).
Keeping some of your inheritance liquid protects you from life’s hard throws and gives you time to make better, longer-term decisions with the rest of your windfall.
Max Out Retirement Accounts
Adding a Roth IRA or 401(k) contribution might be too dull, but it could supercharge your wealth in a big way by taking advantage of compound growth and all the tax benefits, as Fidelity says. Workers contributing the maximum to their retirement accounts save more than those who do not.
Using inheritance funds in the future ensures their legacy will be there for you for years. If you’re over 50, use catch-up contributions to gain some security and peace of mind.
Invest in a Diversified Portfolio
Putting your inheritance in a single stock or sector of stocks would not be a wise choice for its use. Sitting, instead, in multiple assets such as stocks, bonds, real estate, and ETFs will minimize your risk and increase your chances of making strong returns.
Vanguard’s data shows that diversified portfolios have earned higher risk-adjusted returns over the long run. Invest using a research-based strategy or work with an advisor to design an allocation tailored to your timeline, risk tolerance, and goals.
Set Up a Donor-Advised Fund (DAF)
Philanthropy is all about delivering real impact—or at least that’s what it should be—and it carries with it tax benefits. A DAF is a way to make a charitable contribution, receive a tax deduction, and distribute the money over time.
According to the National Philanthropic Trust, funds in DAFs total approximately $230 billion as of its 2023 estimate. This structure allows you to be thoughtful and strategic about what you give. You can enable your family to participate in legacy decisions and support the cause that resonates with your values.
Fund a 529 Plan for Future Generations
Saving for a child’s or grandchild’s education can be done through a 529 plan, one of the most efficient ways to save. According to the College Savings Plans Network, these accounts are a wise choice because they benefit from tax-deferred growth and potential state tax deductions.
A gift that will benefit the next generations and help them stay clear of student debt. Front-load contributions up to five years’ worth and allow your loved ones to enjoy benefiting from compounded returns and financial security for potentially five years.
Buy or Upgrade Real Estate
Even still, homeownership is an effective form of wealth building. According to the National Association of Realtors, the Median Price of a Home reached $412,000 a year ago. Since inheritance funds help to increase financial stability and secure equity, you use them as a down payment or to pay off a mortgage.
If you already have property, you can renovate or rent it for future value. Diversifying your portfolio can also include real estate to hedge against inflation for multiple generations of your family.
Start or Expand a Business
In the U.S., this takes the form of small businesses, which provide some 44% of our GDP and can lead to purpose and profit. If you have entrepreneurial ambitions, inheritance funds can be utilized as startup capital or seed money for expansion.
A strong business plan will underpin your dream, help it fade from memory sooner rather than later, and help you overcome risk with advice. As entrepreneurship isn’t without risks, many experts advise that only the amount of money you can afford to lose should be invested.
Invest in Career Advancement or Continuing Education
Education will enable you to earn significantly more money throughout your career. A Georgetown research notes that a master’s degree can boost lifetime income by an average of $240,000, and credentials or certifications benefit you even more.
With inherited wealth, you can skill up, change careers, or build a lifetime passion. Focus on target programs with clear career outcomes and a strong return on investment (ROI).
Increase Charitable Giving and Volunteerism
Although major gifts often come with tax incentives, research consistently shows that regular giving and volunteering are more effective in promoting happiness and mental health. A Harvard study found that generosity can make life satisfying, even for the physical being.
Set aside some of your inheritance to be used annually or as a match for their contribution to your top nonprofits. Volunteering time boosts impact and ties you to the community in a way that will keep you more informed and involved.
Establish a Trust for Family Members
Although all trusts are powerful for managing and distributing wealth, they offer advantages such as privacy, control, and potential tax benefits. Data presented in the article How Trust Works from U.S. Trust shows that 75 percent of affluent families choose to use trusts for succession planning.
See an estate attorney to decide what’s best for a revocable or irrevocable trust. Make it clear what you intend to do, and review the trust as matters progress.
Review and Update Your Estate Plan
Reviewing the will, power of attorney, and beneficiaries is always a good time. Consider how your new assets will affect your current plans and consult a legal or tax advisor to determine the best approach. This lets your wishes be fulfilled without your family being confused or subject to unnecessary taxes in the future.
Explore Tax-Advantaged Investments
Tax losses, municipal bonds, and qualified dividend strategies help shelter part of your profits from taxes. The IRS makes it easier and more efficient for Americans to invest and save more of what they earn in several ways.
However, consult with a CPA to keep current on the annual limits and changes to the IRS tax code. Structured planning enables you to achieve the best long-term value for your inheritance.
Take a Measured Approach to Gifting Money
Giving family and friends cash has merits, but it is not always easy. The 2024 annual gift tax exclusion is $18,000 per recipient. As this is exceeded, however, paperwork and possibly taxes are triggered.
Deciding how to leave money to everyone on your list without undermining your future or misstepping in terms of IRS rules is a matter of math and psychology. A thoughtful approach preserves or, at best, enhances relationships and your financial legacy.
Support Mental Health and Wellness
Major life events, such as an inheritance, can also cause stress, anxiety, and family tension. According to the American Psychological Association, investing in counseling or coaching in advance can help you consider your options and make informed choices based on your values.
It has a positive impact on your wellness. While mental health should not be a priority when dealing with sudden wealth ineptly, it must be so if you are doing it right. At the same time, it could help you see more clearly as you reframe your aims and how you view yourself in light of fresh situations.
Take Time Before Making Big Decisions
Lastly, allow yourself to stop. Financial planners advise people to wait at least 6 to 12 months after a significant loss before making major decisions regarding inheritance. Step two of influencing buying behavior is to wait for it to unfold—to let emotions settle and avoid making costly mistakes.
Now is the time to build your trusted team of advisors, re-evaluate your life goals, and work at full pace with your options. It honors your loved one’s legacy and allows them to leave behind a lasting legacy for you. It also helps ensure a secure and prosperous future for yourself and your family.
Disclaimer – The Finance Key does not provide and does not intend to provide financial, investment, tax, or legal advice. Information contained in this article is for informational and educational purposes only. This list is solely the author’s opinion based on research and publicly available information. Including links to third-party content is not an endorsement by The Finance Key of such content or services. Please do your due diligence and use your discretion.
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