Inheriting a small fortune often brings about mixed emotions. Feelings of loss, confusion, and anxiety can lead to difficulty in making choices regarding your new assets. But before you do anything rash, you must first complete one important task: do absolutely nothing.
Immediately following a loved one’s passing, you are not in a place to decide how to manage your newly acquired money or property, so the smartest thing you can do is sit tight and wait. Use this time to sort through your emotions, reflect, and grieve. Don’t make spontaneous decisions as if you’d won the lottery, such as quitting your job or selling your home. How long you should put decision-making on hold will depend on your situation, but a year is a good place to start.
When you are ready to better handle the situation, let reality sink in. Did you inherit $1 million, or a piece of land in the desert? Take inventory of the exact value of your inheritance. Is it liquid, such as cash and investments, or illiquid, such as real estate and business ownership? What taxes might be due on it? When you’ve taken these details into account, you can begin to discover the direction of your next steps. Susan Bradley, the author of “Sudden Money,” explains that the average inheritance is $90,000, an amount that may seem extraordinary on paper, but one that isn’t really life-altering.
Your next move should involve planning. What are your financial objectives? Determine if your inheritance will change them entirely or help you reach them sooner. Although an appealing option, stay away from making impulse purchases, a common misstep following inheritances. General prioritizing guidelines will tell you to pay credit card debt first, fund your retirement after that and then save for your children’s college education.
Hiring professional help should be your next action. A lawyer can transfer assets to your name. A financial planner can assist in building the inheritance into your life goals by redefining your investment strategy, taking into consideration your new level of risk tolerance and modified time horizon. If you don’t have a Certified Financial Planner™, you can find one through the Financial Planning Association at www.fpanet.org.
Once you’ve had a reality check, established your priorities, and consulted with professionals to work toward meeting your needs, it’s time to have some fun - realistic fun, that is. If you’ve inherited a substantial sum, maybe you’d like to take the family on a once-in-a-lifetime vacation. If you’ve come into more modest figures, perhaps you can treat yourself to a case of your favorite wine, or a weekend at the spa. But keep it practical - you don’t want to go into debt overspending your inheritance.
Another option, once you’ve eliminated bad debt, maxed out your retirement accounts, and put away for college, requires you to consider the wishes of the person from whom you received the inheritance. What would that person have wanted you to do with it? An inheritance may be the biggest financial windfall of your life; you might want to think about using it in ways that would honor the individual who gave you the opportunity. ■
Katherine B. Paal, MBA, CFP, RFC, CTFA
Paal is a Certified Financial Planner at Heritage Financial Consultants in Lutherville, Md., and is an investment advisor representative, registered representative, and licensed insurance broker with Lincoln Financial Advisors Corporation, a registered investment advisor and broker-dealer (1300 York Road, Lutherville, MD, 21093, (410) 339-6675. You may e-mail Paal at [email protected].