3 Tips for Managing An Inheritance

The process of receiving an inheritance is often fraught with emotion - on the one hand the client has lost a loved one, while on the other, in some instances, the inheritance itself is large enough to be life changing. While each situation is unique, here are three suggestions for how to invest an inheritance.

Don’t Rush

Making financial decisions while under emotional stress isn’t usually a good idea. Given this and the emotion associated with receiving an inheritance, it is typically a good idea to take a bit of time before deciding how to invest it. Avoid making any irrevocable choices like purchasing an annuity or giving money away until you have given yourself time to grieve and can approach the situation with a clear head. (For more, see: ‘I Just Inherited Money' Now What?)

Look At the Big Picture

if you already have a financial plan in place, take a look at how the inheritance impacts your plan. Perhaps you can retire sooner or buy the vacation home that was previously out of reach. Maybe it’s just a question of paying off debt or establishing an emergency fund. Regardless of what your goals are, understanding how the inheritance fits within your overall plan is a key step in determining how to invest an inheritance. If you don’t have a financial plan in place, receiving an inheritance is often a good reason to complete a plan.

Understand What You Have Inherited  

The most common types of assets to inherit are financial assets - stocks, bonds and mutual funds - and real estate. In both instances, you’ll want to understand the cost basis of what you have inherited so that you can understand the tax impact should you decide to sell the asset in question. While you won’t be personally responsible for paying tax on the inheritance, you will owe tax on any gains and income generated by assets once you have inherited them.

In the case of stocks, bonds and mutual funds, once you have confirmed the cost basis, you need to determine if they fit within your overall portfolio or if they should be sold. In the case of real estate, the most common decision is whether to sell or keep the real estate. The ultimate goal when you invest an inheritance is to ensure that it is done in a way that supports your financial plan and complements your existing assets.

Understanding what you have inherited and, if necessary, how to reposition those assets is the most technical of the three issues above. A good financial planner should be able to help you with the first two issues as well by understanding what is important to you and helping you build a plan to achieve those goals. (For more from this author, see: 4 Tips for Planning An Early Retirement.)