7 Tips to Managing Your Inherited Wealth

7 Tips to Managing Your Inherited Wealth
22 Aug 2019
Inherited wealth presents a very particular, sometimes unexpected financial conundrum. Learn how to invest and manage this wealth wisely in this guide.

Have you recently come into some money with the passing of a loved one?

It’s tempting for most individuals to get caught up in thinking of how they’d like to spend their new funds. Unfortunately, the truth is that spending your inherited wealth too quickly could result in some hefty tax penalties.

So what’s the best way to handle your new money so you get the most from it, while still avoiding frustratingly high tax bills?

We’ve broken it down with these 7 easy-to-understand tips.

1. Talk With an Expert

Before you rush off to book a European cruise, the first step is to talk with a certified accountant or qualified financial advisor.

Tax law can be complex and knowing the ins and outs of handling a large sum of inherited money will protect it in the long run.

Enlist a professional who knows tax law and how it applies differently, depending on the type of inheritance you’ve received. Taxes and penalties will be different if your inheritance comes in the form of property, investments, life insurance, or cash.

For example, a good financial advisor will know to save you from cashing out an IRA and rolling it over into your own IRA, as doing so will leave the entire rollover susceptible to standard income taxes.

Regardless of what you hope to do with your newfound money, a professional financial advisory or wealth planner will be an asset and will assist you in making sure you meet your financial goals.

2. Place Cash Somewhere Safe

Cash inheritances are best placed in a bank or brokerage account while you consider what to do with your new funds. 

If you’re married, you must choose whether to put this new account solely in your own name, or whether to make it a joint account with your spouse. Inherited wealth is unique in that should a divorce occur, that wealth is considered separate property.

However, if you choose to place the cash into a joint account, this is no longer the case and your fund are no longer legally considered yours solely.

3. Slash Debt

As much as a new car may sound appealing, if wise financial choices are indeed your goal, one of the best uses of your new inherited wealth is to start by slashing any existing debt you have accrued. 

Start by attacking any debt with high-interest rates. Credit card debt? It’s your enemy. Get rid of it as fast as you can. 

Use your new wealth to pay off car loans, mortgages, personal loans, whatever financial burdens that are your current albatross. The freedom that comes with eliminating your debt will far outway any satisfaction you may receive by burning through your new money with rash purchases.

After all, “A man in debt is so far a slave.” –Ralph Waldo Emerson

4. Set Financial Goals

Once you’ve set your money aside safely, paid off any lingering debts, and found a reliable financial advisory to consult with, it’s time to set some financial goals.

Knowing what end you have in mind for the use of your funds will help you determine where you most value investing it.

Examples of potential investments include:

  • Contributing to your retirement 
  • Saving for children’s college or weddings
  • Planning a family vacation
  • Contributing to charities
  • Purchasing a business
  • Buying property
  • Creating a trust

Again, an intelligent financial advisor will help you identify your goals and make a solid plan for achieving them so you don’t find that you’ve frittered-away your money by acting without proper planning.

5. Evaluate Your Existing Insurance Policy

If you’ve suddenly come into a large sum of money or inherited some kind of property or assets, you may find that your current insurance policy or estate plan needs some tweaking.

You may need to bump-up the liability limits on your home our car policies. You may need to think about getting an umbrella policy. Or, you may want to consider whether the new inheritance makes your current estate large enough to become subject to estate taxes.

Estate planning, if not something you’ve needed in the past, may become a necessary task if your wealth has increased substantially.

All of these considerations and many more are ones to review with your financial advisor.

6. Get Property Appraised

You may have received a house or another property upon the death of your loved one. In this case, the good news is that for tax purposes, inherited homes retain the same market value they did when the benefactor passed away.

Inherited houses are similar in this way to mutual funds or stocks–they have what is called a step-up basis.

Still, this being said, it will be valuable for you to have the house or property professionally appraised as soon as possible upon receiving your inheritance. 

A good appraisal, done as soon as possible, will give you an idea of what the basis is so you can plan better what you might like to do with the property.

7. Spend Wisely

While every individual’s situation is vastly different, inherited wealth is not something that you receive often. Because of this, it’s recommended to plan first and spend very cautiously.

In your goal-making sessions, choose a small percentage you are comfortable with setting aside to use for spending or “fun” money.

You may consider spending anything from 2% to 10%. Again, this will depend greatly on your personal situation. If you have large amounts of debt to repay, using your inheritance to free you will always be a wiser financial move–even if it means you have 0 money remaining for “fun” spending.

Of course, consulting with your tax professional before spending this money will again be vital. What’s the good of cashing out and buying something you enjoy if you find yourself hit with major taxes months later?

Inherited Wealth 101: Find the Right Help

Inherited wealth is both an exciting and potentially challenging thing. With a little education and plenty of sound financial guidance, you can enjoy years of financial freedom, growth, and even fun.

For questions about planning for your financial future, create a profile with us today.


Daryl Seaton