Inheriting money often brings with it a mix of emotions, from anxiety and sadness to anticipation and gratitude. And when such events occur suddenly, it can be difficult to think clearly. As a beneficiary, how should you navigate this situation? By asking a few important questions, you can ensure you make the right choices that align with your values and life situation.
Ask these questions about inheritances of all sizes
Will this change my lifestyle?
When you inherit money, it’s easy to want to make big changes to your life right away. It could be a new car or a big house. Maybe even retirement. But before we get into it, consider the permanence of these decisions. Is this inherited wealth large enough to support lifelong lifestyle changes? Also, working is about more than just income. It provides purpose, structure, and social interaction. If you’re considering early retirement, consider the non-financial aspects of your job as well.
Am I watching this to be happy?
Although sudden wealth can certainly bring comfort and luxury, it is important to understand that true happiness is rarely connected with material gains. Relationships, experiences, and personal growth are the foundation of a fulfilling life. Money is just a tool. Think of this inheritance as a way to support and enhance these aspects rather than replace them.
How can I honor the individuality of my heritage?
Inheritance is not just a financial asset, it is a legacy. Remember the person who entrusted you. Did they want it to be used for a specific purpose? Was there a reason they were passionate about? By aligning some of your choices with their values, you not only honor their memory, but also create a bridge between generations.
In 20 years, will you look back and be glad you did what you did?
It often becomes clearer over time. Imagine the distant future. Will your immediate choices still resonate positively in 20 years? Long-term thinking helps you prioritize what really matters.
Ask the following questions for larger inheritances
Do you understand the tax implications?
Inheriting a large amount often comes with various tax considerations. Here’s a quick breakdown:
inheritance tax: Depending on the size of the estate and where the decedent lived, the estate may be subject to federal or state estate taxes. These taxes are based on the net value of the estate and can significantly reduce your overall inheritance.
Income tax on inherited IRAs: If you inherit an Individual Retirement Account (IRA), you may be required to take required minimum distributions (RMDs), which may be taxable. Tax treatment depends on the type of IRA (traditional vs. Roth) and your relationship to the deceased.
Capital gains tax: If you sell inherited property or stocks, you may incur capital gains tax based on the difference between the inherited value and the sale price. Any mistakes or oversights can result in a large tax liability. It is important to work with a tax professional who can guide you through these complex issues. These help ensure compliance while optimizing inheritance.
Is it okay to take it slow?
The excitement and sense of responsibility that comes with inheriting a large amount of wealth can feel like a wave of immediate action. However, important financial decisions, especially those that affect your long-term financial trajectory, deserve careful consideration.
Remember that while an inheritance may come suddenly, the decisions you make about it don’t necessarily have to be sudden. Taking a step back will give you space to process, understand the full range of options available to you, and allow you to consult a professional. This cautious approach can be the difference between building a legacy and suffering financial failure.
Do I have a team of advisors who can help me?
Although it may be tempting to trust your instincts, large inheritances come with many complications. That’s why relying on an experienced team can be so valuable.
lawyer: Laws regarding wills, trusts, and estates can be complex. A lawyer can help ensure that all legal formalities are followed, rights are enforced, and potential pitfalls are avoided.
Accountant: There are many potential tax implications, so an experienced accountant can help you understand the tax laws and minimize your tax liability.
Financial advisor: Beyond the direct impact, there is a broader picture of asset management. How should I invest? What is your risk tolerance? How does this inheritance align with your long-term financial goals? A financial advisor can analyze this information and provide a strategy tailored to your unique situation. .
Working with a team of experts is not just about managing your legacy, it’s about ensuring the continued health of your legacy.
consider your options
Inheritance presents a wide range of opportunities. Among them are:
Give it: There is a unique joy in philanthropy. Supporting a good cause or charity can create a ripple effect in your community.
Gifts for others: Whether you’re establishing a college fund for your child or helping a friend in need, gifts can be a way to distribute wealth.
Use for education: Knowledge is itself a form of wealth. Consider courses and degrees that will enrich your life and that of your family.
Repaying a mortgage or debt: Financial freedom is liberating. You can breathe easier by using your inheritance to eliminate debt.
Planning a family trip: Traveling is not only a way to recharge your batteries, but also a way to create lasting memories.
Receiving an inheritance is both a privilege and a responsibility. Money is a tool, often a very powerful tool, and can have a lasting impact on those around you. I wish you success in your personal journey.
Hunter Yarbrough is a CPA, CFP, and vice president and financial advisor at CapWealth. He has a passion for looking at personal finance holistically, including investments, taxes, retirement, education, estate planning, and insurance. For more information about Hunter and his CapWealth, visit capwealthgroup.com.
