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Date: June 1, 2020

I Just Received An Inheritance, Now What? 

Whether it’s a bequest of stocks and cash from a beloved aunt or a house from your grandparents, receiving an inheritance can be a watershed moment. While it may come with emotional pain at the loss of a loved one, an inheritance has the potential to change your life financially.

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But only if you handle it wisely – and the fact is, many people don’t. About one-third of people who receive an inheritance have spent it all within two short years. And that applies to generational wealth, too: 70 percent of inherited wealth is gone by the second generation, and 90 percent of it is gone by the third generation.

So with those multiple cautionary tales in front of you, what should you do with your inheritance? Here’s a rundown of prudent moves to make.

 

Do Nothing, For A While

Inherited money tends to vanish because beneficiaries spend it quickly. You may have been hankering for a Lamborghini, diamond jewelry or a beach house on an expensive island, and now’s your chance, the thinking goes.

There’s nothing wrong with fancy cars, expensive jewelry or a house by the beach. But quick purchases on luxury items tend to make money evaporate. 

The best move is to park your inheritance in a certificate of deposit (CD) or another cash account for six months to a year, while you consider what to do with it. A thoughtful plan is best. At the end of that time, if a Lamborghini still looks good, you can go for it.

 

Consider Your Life Goals And Make A Financial Plan

The best financial plans are set up with your life goals in mind. A financial planner can work with you to set up your cash flow to achieve goals, such as a robust retirement, a child’s education or that house by the beach.

The underlying principles of an inheritance are not really different – it’s just more money all at once, and it may arrive in a lump sum or physical assets like a house. You should think through what you most want to achieve and how to get there. What can and should your inheritance be doing for you in terms of what you want your life to be like in five, 10 or 30 years?

It’s a good idea to consult a financial planner to guide you through potential uses for the money. If you are carrying a great deal of debt, for example, it might be smartest to pay it down with the inheritance. If you have a lot of credit card debt, for example, you might be paying 17 percent on average for it. That’s negative earnings of 17 percent per year – plus, any kind of debt eats up a portion of your cash flow.

Similarly, if you don’t currently have an emergency fund of up to three months’ worth of your average expenses, it can put your life on a better financial footing to use at least some of your inheritance to build that up. 

Beyond those moves, here are some potential moves for your inheritance:

  • Down payment on a house or new house if you want to move – if you had been saving for a first home or a larger home, this can be an especially good use of an inheritance.
  • Retirement savings – you can plan for a comfortable retirement by investing now in tax-advantaged plans, which can let your money grow tax-free 
  • Educational funds for your children or grandchildren – many states have 529 educational plans that allow you to save for qualified educational expenses tax-deferred
  • Investments – save for future plans and security by setting up a portfolio of investments

 

Ask About Your Taxes

If you either live in the Greeneville, TN area or are thinking about moving there with your newfound wealth, you may already know that taxes are relatively low (with the exception of sales tax). 

In addition, Tennessee doesn’t have either estate or inheritance taxes, which is very good news for you. (You will have to file a Federal estate tax return if what you inherit has a gross asset and prior taxable gift value of more than $11.8 million.) 

You also need to know the difference between estate and inheritance taxes. An estate tax is just what it sounds like: a tax on the estate and all its assets. The tax, if levied, must be paid before the assets are distributed to beneficiaries. An inheritance tax is levied on the specific people who have inherited money or other assets, and the tax is paid by them. 

 

Think About The Future

If you have inherited a considerable sum or assets, it’s also prudent to think about what you want to leave for the future. You may want to set up a trust for your children or grandchildren, for example, or think about charitable or other philanthropic giving. 

These decisions are best approached cautiously and with a plan in mind, but it is something to be thinking about as you consider what to do with your inheritance.

 

Interview Certified Financial Planners

It’s prudent not only to consult financial planners about this in the Greenville TN area about this but to make sure that the financial planners you choose are qualified and have worked with clients who have a similar situation to your own. 

Certified financial planners (CFP®s) are trained and qualified to work with each aspect of a financial plan, including investments, retirement funds, estate plans, and taxes. They have a fiduciary duty to their clients, which is the highest level of financial care and trust.

You will likely get the best service from a CFP® who has worked with people who have inherited assets of the same type you are inheriting and whose net worth is roughly the same level as your own, as they will be experienced in the issues that beneficiaries and people with significant assets encounter. 

It’s a good idea to interview several CFP®s, which are inherently fiduciaries, in the Greeneville area about their experience and their ways of communicating and working with their clients to choose the one you’d be most comfortable working with. 

At Sapiat Asset Management, we use a unique, personalized process to identify the needs of our clients. We are with you every step of the way. Contact us today for a complimentary consultation.

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Sapiat Asset Management is a Fee-Only, Independent, Registered Investment Advisor (RIA), specializing in goal-oriented financial planning and investment management for Gen X Individuals & Families, their Businesses, & the Trusts that benefit them.

Author:

Steve Dick

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