5 Things to Do When You Get an Inheritance

Woman thinking while holding money.

Receiving an inheritance from a family member may seem like a blessing, but sometimes it can feel like a curse. In the next three to four decades, $30 trillion will transfer from baby boomers to their heirs. A lump sum of money may seem like it will last you a lifetime, but most people go through it in just a couple of years.

About 20% of U.S. consumers receive an inheritance at some point in their lives, averaging around $180,000, yet nearly three-quarters of people who are left money will lose it all in just a few years.

If you are lucky enough to inherit a large amount of money, here are five steps to help ensure that your fortune lasts at least as long as you do:

1. Don’t Make a Decision Right Away

The first thing you may want to do after receiving a large sum of money is to look for ways to spend it. Buying yourself new clothing, an expensive car, a vacation, or even a vacation home may sound like a great idea. However, taking time to create a smart plan is the best way to begin an inheritance. Put your new money in a CD for six months to give yourself time to figure out what you really want from the money. Allow yourself time to heal from your loss to avoid making emotional financial decisions.

2. Pay Off Your Debts

When you have begun to heal and can think clearly, tackle your debt. Paying down loans and credit cards with high interest, is a great first move. But think twice before paying off your mortgage, because the money may have a better use in a different investment.

With debt out of the way, it will become much more manageable to keep your credit cards low and to make payments on time. Once things are on track again you should start an emergency fund. Consider setting aside three to six months’ worth of living expenses incase of an emergency.

3. Start to Invest

If you let your money sit in a traditional bank account, it will lose money over time, because the interest rates for many savings accounts don’t keep track with inflation. After you have maxed out the contribution limits on your tax-deferred accounts, an IRA for example, you may want to look at ways to invest the money. Find mutual funds with good growth and spread your money across the four different types of mutual funds:

• Growth
• Growth and Income
• Aggressive Growth
• International

Depending on the size of your inheritance you may want to purchase a rental property outright. If you can afford the home in all cash, it will be a great monthly income for you.

4. Splurge Thoughtfully

Now that your debts are covered and your assets are invested, it is time to have some excitement. If your investments are going well and you have money left over each month after paying your bills, you can splurge a little bit. Make sure not to overdo it by buying a garage full of exotic cars.

5. Set Up a Living Trust

Set up a living trust to protect your inheritance for your loved ones upon your demise. A living trust allows you to make changes to the trust document while you are still alive, giving you the flexibility to change your mind over the years. It is important to be prepared for anything and be certain that your assets are divided the way you want them to be.

If you have more questions about inheritance laws pertaining to you and your spouse, contact a lawyer for legal assistance. Call the trusted estate planning attorneys at Lowthorp, Richards, McMillan, Miller & Templeman at (805) 981-8555 or fill out our online contact form.

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