How to handle an inheritance responsibly
A windfall of wealth is exciting. One day you’re sitting at your kitchen table making a home-cooked meal, and the next, you’re sitting at Nobu ordering a 32 oz. steak. But before you blow it all on rare meat and expensive champagne, there are a few things you’ll want to do. The first and most important step: speak with a financial advisor.
Baby boomers are retiring. The second-largest generation in US history (trailing only millennials) lived through an era defined by political upheaval and cultural change. This generation fought in the Vietnam War, attended Woodstock, witnessed the assassination of a sitting president, listened to the Beatles, and took a historical stand for the civil rights of black Americans. Fingers crossed their golden years are a little less tumultuous.
For us, their children, and other younger relatives, this transition has profound and often scary implications, both personally and financially. But there can be silver linings. If you’ve received an inheritance or know you will receive one soon, there are simple steps you can take to handle the money responsibly and in a way that honors those who gave it to you.
If you receive an inheritance, hit the pause button
When you receive an inheritance, it’s likely going to be an emotional time in your life. And emotions can leave us vulnerable to making bad financial decisions. It’s one thing to buy a vat of gourmet ice cream after a bad day at work, but you don’t want to become a statistic: studies show that most people who receive inheritances blow through the money within five years! Not a smart financial move or a great way to say thanks to your benefactor.
Don’t make any major purchases or investments right away, and be wary of any financial professional who pressures you to do so. Chances are, they’re attempting to take advantage of you at a time when they think they can get away with it.
That said, don’t wait forever to create a plan. Not doing anything with the money is almost as dumb as blowing it all. The person or people who left you the cash did so in hopes that they could boost your quality of life, so make sure that you do.
When you're ready, speak to a financial planning professional
And make sure they’re a fee-only fiduciary, which means they are legally required to put your interests first. Your newfound wealth can make you easy prey to large investment firms and scammy salespeople. A fiduciary financial planner will usually charge you a flat fee for their services rather than earn commission on products they sell you or investments they make on your behalf (Hint: Stash Wealth is a fee-only fiduciary).
You should also make sure that the financial planner you choose to work with has expertise in tax and estate planning, or can refer you to someone who does. The taxation of inheritances can get pretty complicated, so you’ll want a pro in your corner.
Create a plan for your inheritance
Every situation is unique, which is one of the reasons it’s so important to work through yours with a financial planner. But generally speaking, you’ll want to ensure you have a good financial foundation first. This includes setting aside an appropriately sized emergency fund and paying off any high-interest debts.
After your foundation is set, you should start planning for the future, like retirement and saving for college, if you have kids.
Once your short- and long-term goals are addressed, you can start thinking about mid-term goals like buying a home, starting a business, planning for a family, or even donating to charity.
Dealing with the loss of a loved one is always going to be hard, but handling the financial windfall doesn’t have to be. If you’re in this situation or know you will be soon, consider a Stash Plan, our fee-only fiduciary planning model that puts you and your goals first.
Stash Wealth provides financial plans designed to assist high earning young professionals build and manage their wealth.
Stash Wealth offers a pragmatic approach to financial planning and wealth management. Whether saving up for Tahiti or a Tesla, we help you achieve your short-term and long-term goals.
Written by Stash Wealth Staff Writer
Stash Wealth Staff Writers are knowledgeable about personal finance topics. Their objective is to unravel the complexities of finance trade jargon, products, and services in order to equip HENRYs with a sound understanding of financial matters.