Due to its unexpected nature, you may not know what to do with your inheritance or where to begin. Here's what to do.
Inheriting assets or a large sum of money is often a once-in-a-lifetime event. Due to its unexpected nature, you may not know what to do with your inheritance or where to begin. Below, we’ve outlined a few tips to help you avoid hasty mistakes and how to use your inheritance to secure your financial future.
First things first, what is inherited money?
Inherited money is a collection of assets you may receive from a loved one after they pass away. Inherited assets may include cash, investments such as stocks and bonds, real estate, cars, jewelry, furniture, artwork, and other valuable items.
Depending on the structure of your loved one’s estate, you may receive the inheritance right away. If the estate has to go through probate, the process could take longer — possibly several months or longer.
One of the first questions you may have after receiving an inheritance is whether you owe taxes. Fortunately, there is no inheritance tax charged by the federal government, and only a handful of states levy taxes on cash, real estate, or other assets you inherit.
The states that impose an inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If your state charges these taxes, you may qualify for an exemption depending on the size of your inheritance, among other factors.
Though it’s unlikely you will owe taxes on money or assets you inherit, you will owe taxes on future gains if you sell the inherited property. It’s always a good idea to speak with a professional to confirm your tax status and help minimize your bill.
Receiving an inheritance is an opportunity to get ahead financially — and making uninformed or hasty decisions can cause costly errors. So, how can you be sure you make the most out of this unexpected opportunity?
It’s critical to delay making any big decisions regarding your inheritance while you’re still in the early stages of grief. This helps avoid making emotional decisions with the money you may not have made otherwise. Give yourself some time to process the loss of your loved one to avoid lasting consequences.
One of the first things to do when you inherit is put the money in a safe place — such as an FDIC-insured bank account.. It’s a good practice to wait to make any big purchases with the inheritance money for 6-12 months — unless it was a purchase you were already planning to make. As long as the money is properly stored, there’s no harm in waiting until your emotions are less raw.
Now that you understand the tax implications of receiving an inheritance, it’s time to decide what to do with it. Here are some ideas on where to put inherited money to secure your future.
Becoming debt-free is a dream for many, which is why some people choose to use some or all of their inheritance to pay off their debts, such as credit card or loan balances, mortgages, and other types of debt.
Whether you choose to pay off some or all of your debt is up to you. However, you may want to consider paying off any high-interest debt to save money in the long run. It’s a good idea to consult with a fee-only financial advisor to help you run some scenarios and identify the most beneficial debt repayment strategy for you.
Another popular way to use an inheritance is to invest the money. Before going with this option, you need to decide how much of your inheritance you want to invest and consider your goals. Below, we’ve listed some common ways people invest their inheritance.
You may want to factor charitable giving into your inheritance spending strategy. Maybe there’s a local nonprofit you wish to support, or you want to make a large donation to the hospital that cared for a loved one. There are tax deductions available to those who give, but it’s best to talk with your financial advisor about the right tax strategy for you.
Depending on the size of your inheritance and your goals, your plan may be a combination of the above. The idea is to think strategically about your inheritance and how it can help you achieve your new and existing goals.
Receiving an inheritance may get you thinking about your own estate plan. If the process was easy, you might want to ensure the same for your heirs. Conversely, if inheriting was complicated, it may spur you to take action to help your loved ones avoid this experience in the future.
Fortunately, the rise of online estate planning has made the process of creating wills, trusts, and other legal documents more accessible than ever before.
Start protecting your legacy today with one of our low-cost estate plans (basic wills are free). Settling your estate is a trying time for your loved ones — help ease the burden for your family by outlining your wishes ahead of time.
This post was written by MyAdvocate's team of estate planning attorneys.