How to Handle Inheritance

Managing an inheritance can be emotionally and financially challenging. Just as you've lost someone close you must decide what to do with what may be the largest sum of money you've ever had. But before you go swimming in a sea of dollar bills, you may want to consider proper money management by doing the following:

1). Consult a financial adviser.

If you had bad financial habits before, a windfall might only accentuate them. Financial planners can help to create distance between you and the money, and even set you up with an allowance if you're concerned about the possibility that you'll squander it. But don’t just settle for the first advisor who meets the eye; Interview several Financial Advisors before you make the all-important decision. Financial Advisors can help you come up with a financial plan that will meet your financial goals, both short-term ones (big-ticket purchases, for example), and longer-term goals like retirement.

2). Cut debt and build a safety net.

Your initial impulse might be to use the money to pay off your mortgage. But higher-interest debt, like credit cards and personal and auto loans, should be tackled first. After that, consider building your emergency fund to at least six to 12 months' worth of living expenses. And since your newfound wealth might make you an attractive target for a lawsuit, increase the liability limits on your auto and homeowners insurance. Adding an umbrella liability policy if you don't already have one will supplement the liability protection on your homeowners and auto coverage by $1 million to $5 million.

At this point you might consider paying off some or all of your mortgage. But the decision will depend on the rate on your mortgage vs. the return you can expect to get putting the money elsewhere. If you're retired or coming close, it might make sense to use your inheritance to pay off your mortgage so you don't have that big payment to make each month.

3). Consider fees and taxes.

If you inherit assets other than cash, the amount you get might turn out to be less than you expect after you sell them. For example, if your parent leaves you a house assessed at $5,000,000, you'll probably have to pay a real-estate agent to sell it. If you inherit stocks, you'll have to pay a brokerage commission when you sell them. Your cost basis is the value of the assets on the day the owner died, so you might owe some capital gains tax if the assets sell for a higher price. If there are any estate taxes due, they will be paid by the executor before the property passes to you.

4). Learn to say no.

Your newly found wealth will undoubtedly attract the attention of many, including long lost friends and family members. But before you go ‘saving the world’, you need to ensure that your giving habits are properly paced. Or before long, you might end up right where you started. Importantly, avoid financial salespeople, especially those selling annuities and other insurance products.

5) Indulge yourself—a little.

Once you've handled the steps above, feel free to buy yourself something nice or take a vacation. But limit your indulgence to no more than 10 percent of the inheritance. Be careful about sampling the luxury lifestyle too much as luxuries can quickly become necessities and you wouldn’t want to end up drowning in a sea of bad credit, because life is always better with good credit and keeping track of your history with a credit report from CRIF NM.

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