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Legacies: The DOs and DON’Ts of Receiving an Inheritance

Legacies: The DOs and DON’Ts of Receiving an Inheritance

Michelle T. Thompson, Esq., CFP®, CTFA, CDFA®
July 28, 2020

Losing a loved one is very disorienting. If an inheritance is associated with the love one’s passing, that gift can cause a host of emotions, conflicts and decisions.  Whether you knew about the inheritance or not, it can be overwhelming to receive a lump sum of money or property. I know this from both personal and professional experience.  With experience comes insights, and I would like to share these insights with you as a “dos and don’ts” list.

DOs:

Take a Breather

Inheritances are the result of transitions, which can be stressful under the best of circumstances and devastating under the worst. Sometimes, the best thing to do with an inheritance is nothing. Impulse purchases are common and can hit epic proportions faster than anyone expected. Once you’ve had a cool-down period, it’s recommended that you list out priorities when it comes to long-term financial goals.

Plan for Emergencies

Unexpected illnesses, accidents and natural disasters may not be predictable, but they are all inevitable. Depending on your income and the amount of the inheritance, consider setting aside enough to cover expenses from a major future emergency, such as car repairs or medical bills.  A good rule of thumb is to have at least 6 months living expenses in your “emergency fund.” To cut down on spending temptation, try to put the fund into a savings account rather than a checking account, if possible.

Pay off Debt

Debt often has nothing to do with how much you owed at one point, but rather how much interest has accrued since then. Paying off debt opens up cash flow for the future, and it cuts out future interest. Debt has a way of monopolizing your life, regardless of how well it’s being managed. When it comes to long-term debt though, such as mortgages, it’s more practical to look at your interest rates before deciding on one course of action over another. For example, a low-interest rate on a 30-year mortgage probably doesn’t need to be paid off when the money can be invested instead.

Build a Team of Advisors

Find a financial advisor that you trust. Ask for referrals from friends, colleagues, etc. to develop a list of advisors to contact. A financial advisor will be able to guide you through the process of consolidating and re-titling assets, prioritizing goals and managing your inherited assets. Having an estate attorney and accountant are also valuable members of your team.

DON’Ts:

Don’t become the bank for your family and friends.

Don’t spend all of your inheritance before you even have it. The person you received the inheritance from worked hard and has now entrusted you with it, don’t squander it.

Don’t do it alone. It’s important to invest the time and money and consult with someone qualified to assist you with managing your inheritance. An estate planning attorney and a financial advisor can provide invaluable guidance to ensure you understand the nature and value of your inheritance.

Don’t let well-meaning “friends” steer you toward risky investments. You may find you are suddenly inundated with suggestions from friends, family members, and even co-workers about how you should spend and/or invest the money. Always discuss investment ideas with your legal and financial advisor to prevent being talked into potentially risky investments.

Don’t go overboard with your splurge. While it’s alright to splurge on something with your unexpected inheritance, make sure you don’t go overboard. Your purchase shouldn’t be proportionate to the value of your inheritance. For example, if the value of your inheritance is $100,000, your splurge should not cost $50,000. Think in terms of one to two percent of the value of your inheritance.

If you are wondering how an inheritance impacts your life and financial future, please feel free to reach out to us at Atlanta Financial at 770-261-5380.

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