Four Ways to Control an Inheritance Before it Controls You

Personal finances can evoke enough emotional stress as it is. An inheritance can add another layer of complexity entirely.

Inherited money can carry the weight of a lost relationship. It can feel overwhelming trying to determine the “right” way forward. This sudden wealth can feel life-changing in both exciting and intimidating ways.

How do you make this money last? What role do you want it to play in your life now, and what opportunities do you want it to create for the future?

While every situation is different, there are a few principles worth keeping in mind before making major decisions with an inheritance to ensure you are controlling your finances, not the other way around.

Tip One: Give Yourself Time Before Making Major Changes.

One of the most common temptations after receiving inherited money is the urge to act quickly. Sometimes that looks like making large purchases. Other times, it means immediately selling investments, paying off every liability in sight, or radically changing your lifestyle overnight.

Fight the urge to rush.

Instead, give yourself time to envision what you truly want life to look like moving forward. Do you want to make a large investment purchase? Take a sabbatical? Retire earlier? Create a generational legacy? Or, generally add more flexibility to your day-to-day? The options are wide ranging, as are the strategies to get there. It is important to set both practical short-term goals and thoughtful long-term goals, then begin evaluating what is realistically required financially using in-depth cashflow analysis.

Can this money sustainably support the future you are envisioning?

It is far better to understand that answer up front than months or years down the road when the plan becomes difficult to maintain.

Tip Two: Understand What Risk Means to You.

The person you inherited money from may have had a very different relationship with risk taking than you do.

Perhaps they were significantly older and invested conservatively in bonds and kept a lot in cash. Or maybe they accumulated wealth through concentrated stock positions, real estate holdings, or a business that you have little or no personal experience managing.

An inheritance should not automatically dictate your own investment philosophy moving forward.

Take time to evaluate what types of assets you are personally comfortable holding through both good markets and bad ones. For many people, this includes a diversified portfolio of stocks and bonds. Your goals and your comfort with taking investment risk should work hand in hand. It is important to know that the “best” investment strategy on paper, or by someone else’s standard, is not always the best strategy for the person living with it: you.

Tip Three: Know the Tax Impact Before You Act.

Not all assets are taxed the same. Understanding what you’ve inherited from a tax perspective is critical before making large financial moves. The last thing you want is an avoidable tax surprise that significantly reduces the inheritance you are trying to preserve or put toward specific goals.

Some inherited assets, like appreciated stocks in a taxable investment account or an inherited Roth IRA, can be incredibly tax efficient when handled properly. Others, such as inherited traditional IRAs or 401(k)s, can create substantial taxable income and come with complicated distribution rules.

It can be easy to overlook tax implications during periods of grief or transition, so knowing the rules and income tax planning opportunities is critical.

It is deserving of your time to learn what tax rules apply to your situation and have them down pat before any moves are made.

Tip Four: Give Yourself Grace.

One of the more difficult emotional dynamics surrounding inherited money is the pressure to use it “correctly.”

It is easy to become consumed by thoughts about what your loved one would have wanted you to do with the money. That pressure can create analysis paralysis and strip away a sense of security, peace or opportunity the inheritance may have otherwise provided. When you find yourself stuck in your head on what to do, ask yourself a few simple questions:

Am I using this money in a way that brings fulfillment and alignment with the life I want to build?

Am I managing this money in a way that reflects my own comfort with risk and leaves flexibility for any needs I may have on a rainy day?

If the answer to these questions is a resounding yes, chances are you have done your part in honoring and respecting both the inheritance and the person behind it. It is important to remember that stewardship does not require perfection, it simply requires a bit of homework and a thoughtful understanding of your wants and needs.

This material is intended for educational purposes only. You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost. Advisory Services offered through Avise Financial Cooperative Inc, a Registered Investment Adviser with the SEC. Registration of an investment adviser does not imply a certain level of skill or training.