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How to Effectively Manage an Inheritance

We are currently going through a huge transfer in wealth. According to the market intelligence firm, Cerulli and Associates, the Silent Generation and the Baby Boomer generation will pass down $84.4 trillion dollars in assets through 2045. According to the US Bureau of Labor Statistics, about one third of U.S. households expect to receive an inheritance.

Unfortunately, many are unprepared to handle an inheritance. A study by Jay Zagorsky, a research scientist at Ohio State University, found that adults save one half of their inheritance and spend, donate, or lose the other half. He also found that more than one third of inheritors saw a decline or no change in their wealth after receiving an inheritance.

To effectively manage an inheritance, you need to take a strategic approach. Avoid making any major, unnecessary decisions for at least six months. Upon receiving an inheritance, you are probably grieving and may feel confused, guilty, or overwhelmed.  Avoid impulsive reactions, give yourself some time to reflect and avoid emotional decisions. Avoid spending to ease the pain – losing a loved one is extremely emotional and can disrupt your decision making.

Before you start spending money, create a plan. Assess your current financial situation and re-evaluate your short-term and long-term goals. Honor the memory of your loved one and consider the work that led to your inheritance. This can inspire you to spend and invest your inheritance in a meaningful way and approach it with a sense of responsibility and intentionality.

When developing a plan consider taking actions that can improve your financial future. Consider paying off debt, establishing an emergency fund, paying down a mortgage, investing in your retirement, and saving for your children’s college. You also may want to make a donation to charity.

Set aside some money for fun. This may include doing something meaningful to honor the decedent. Consider taking a family vacation, and visiting a location or engaging in an activity that was meaningful to your loved one.

When you receive an inheritance, it is essential to understand the tax consequences of the accounts you inherit. The regulations and tax liabilities associated with retirement accounts can be confusing and complex. You will also want to establish a financial plan that meets your goals and objectives which may be quite different from that of the decedent.  You do not have to maintain the same securities and asset allocation that your loved one held, your timeframe and goals are different.

If you inherit a significant amount of money, it can be helpful to hire a team of professionals to assist you. Consider hiring a financial advisor, a tax professional, and an estate planning attorney. If you are experiencing a great deal of grief, guilt, or confusion you also may want to hire a therapist to help you work through the emotions associated with inheriting a generous sum of money.