Losing a loved one is never easy. From planning funeral arrangements to organizing their financial affairs after they’ve passed, there’s a lot to think about on top of grieving their loss. Inheriting a sum of money or assets from your loved one can offer a great sense of financial relief, but it can also bring about a number of questions that can complicate the situation.
How do I distribute the inheritance among family members? Do I have to pay taxes on income from an inheritance? Should I invest my inheritance or use it to help pay for my day-to-day living expenses?
Here are some tips to help you manage inheritance money while complying with tax standards and positioning your assets for growth.
1) Meet with a financial planner
Inheriting a sum of money can be a stressful experience, no matter how much or how little you’ve received. On one hand, you’re relieved at the extra cash to help you cover expenses and get through this challenging time; but on the other, it’s just one more thing for you to think about. Meeting with a financial planner or advisor can be a great way for you to determine the best way to use your inheritance money.
Keep in mind, hiring a financial planner comes at a cost so it’s important to consider how much of your inheritance you’d need to put toward those fees. If your inheritance isn’t so substantial but the fees are, you might want to reassess and consider what other options you have to manage your funds.
2) Estimate your tax liabilities
The federal government does not impose inheritance and estate taxes, but depending on which state you live in, you might owe a certain percentage in state taxes. Consult a tax professional to learn more about your state tax liabilities.
3) Consider your immediate financial needs
In addition to paying any state taxes you owe, you’ll also want to think about whether or not you need to use any of your inheritance funds to pay for immediate expenses such as:
- Funeral arrangements
- Debts owed by the deceased
- Medical bills
- Real estate fees
Getting these expenses paid for and out of the way is crucial if you want to avoid accruing any penalty fees or potential debt collections measures on the behalf of the deceased.
4) Discuss options for spending, saving, and investing
Once you’ve allocated inheritance funds to cover taxes, debts, and other necessary expenses, you’ll have a better idea of what’s actually left for you to work with. Trustees should note that the trustor may have explicit instructions in their estate for how they should spend their inheritance. Oftentimes trustors designate a certain amount of money to each family member or toward specific expenses such as education or real estate investment.
If there are no instructions on how to use the funds, you may consider spending, investing, or saving it. Although an inheritance can feel like a substantial amount of cash at the start, beware that this money can run out quickly if you make a habit of spending it on impractical items. Sure, treating yourself to a vacation or a needed item like a new computer could be a good way to spend it, but you should consider all of your options before you start spending.
Perhaps paying off your credit card or student loans would boost your financial wellness. Or maybe contributing to a retirement plan would put you in a better position to retire comfortably. Or, you might consider investing money in real estate or on the stock market to build your inheritance.
Figuring out how to spend your inheritance money can be confusing and time-consuming. Use this guide to help you navigate the process.