Although it is generally great to have plenty of money and assets which can provide you with financial security and increase your quality of life, with a large number of resources comes significant responsibility to manage what you have. Failure to do so can result in losing your capital to mismanagement and foolish mistakes. This is why you have to be particularly careful when you know you are going to receive or already have received a large inheritance. The following are some tips on how to do so.
Realize the future is unknown
No matter how sure you are about receiving this large inheritance you should make financial decisions as if you are not going to receive it. Anything can happen like your family member or loved one falling ill to a serious medical condition, forcing them to deplete the inheritance you would otherwise have received after they pass away. Or they may change their minds and leave the inheritance to a charity or another relative. It is wise to continue working and earning money and investing as you normally would with the aim of securing your financial future.
Avoid hasty decisions
When you lose a loved one you will likely not be in the most stable emotional state, depending on how close you were to the deceased. This is why it is important that you do not rush to make major decisions on what to do with the inheritance you have received. When your emotions are not under control you are less likely to make rational decisions. Wait until you are in a better emotional state before making any big financial decisions.
Pay off debts
Using your inheritance to pay off debts may be a good idea for many people. You may want to prioritize paying off debts that are charging the highest interest rates first. However, although your mortgage is generally a lower interest debt, it would be understandable if you would feel more secure with your home being completely paid for. If you have a higher risk tolerance you may instead decide to invest the money for a higher return than the interest charged on your debt.
Research tax implications
It is unlikely federal estate tax law will affect your inheritance unless the inheritance is quite large. The estate is only subject to federal estate taxes if valued at $12.92 million for 2023. State inheritance taxes are paid by the estate so you will not have to deal with it.
On the other hand, there are specific types of assets that can result in various tax implications that you will want to be aware of. For instance, inheriting a stock portfolio will mean you may be subject to capital gains tax for stocks that appreciate. Income from dividends paid from stocks or other types of assets that produce income will be subject to income tax laws. Individual Retirement Accounts (IRAs) also have their own specific tax implications.
Consult with a financial professional
Dealing with finances can be complicated and time-consuming. It never hurts to seek the advice of an expert financial advisor when it comes to making significant financial decisions, including what to do with your inheritance.