Inevitably, there will come a time when a loved one (or loved ones) in our lives will pass away and leave saddened relatives and friends behind, as well as leaving behind an estate. An estate is created at the time of one's death, and while I would love to believe that inheritances are not on the priority of consideration for individuals at the time of one's death, sometimes they are.
So, someone near and dear to you passes away and named you a beneficiary in their will or as a recipient of their bank/brokerage accounts...now what? Grief is something that ought to be addressed first, obviously, but once you have moved beyond that point, what happens next?
Here are three vital items to keep in mind when you are set to receive an inheritance, but also remember that working with an attorney and or a financial planner is also imperative to make sure you are not being ripped off in any way.
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1. Take Your Time, Don't Rush
It's never a good idea to make any decisions (especially financial ones) under duress or stress. Since there are lots of emotions associated with inheritances, it's usually a good idea to step back for a while before deciding how to invest it. Those assets and monies aren't going anywhere -- you can take your time to grieve and then, when you have a clear head and a lighter heart, return to the financial matters. Don't let anyone pressure you into taking action with inherited money immediately (even if its a spouse). Some people end up making decisions under duress that they can't take back -- like buying an annuity or giving money away -- and they could have avoided this if they had just taken the time to heal and clear their head first.
2. Consider the Big Picture
Reckless survivors of those with established wealth often fail to see the bigger picture of where and how that money is used, and so they take a lump sum of cash (or a valuable asset that they sell) and spend it all on one big ridiculous purchase. Not much can be done for these people, but if you already have a financial plan in place, it's very helpful to take a look at how your inheritance can fit into your overall plan. For instance, maybe you can use that money to retire sooner, pay off your mortgage earlier, pay off your outstanding debts (like credit cards or student loans) or finally start an emergency fund. There are many possibilities about fitting that inheritance into the overall picture, and if you do not have a financial plan, now would be a good time to get started. Think about this money for the long term, not just whether or not you really need that jet-ski.
3. Make Sure You Understand What You've Inherited
If financial assets are not your wheelhouse, then I highly suggest you get someone who does understand them to help you. Many people end up inheriting, not cash, but investments (stocks, bonds, mutual funds, real estate, etc.) and often times they don't fully understand what they have. You will want to understand the cost basis of what you inherit so you understand the tax implications if/when you decide to sell it. You won't be responsible for paying tax on the inheritance itself (common to popular belief) but you WILL owe taxes on the gains/income generated by assets once they com into your possession. With items like stocks, bonds and mutual funds, once you know the cost basis you will have to determine if you should keep them in your portfolio or if they need to be sold. With real estate, you can either keep it, maintain it, pay taxes on it OR you can sell it.
With all of these items, you want to make sure that the inheritance fits into your plan. The best way to make sure that it does, it to work with a financial planner who will help you address the issues above, as well as creating your own estate plan for the future.
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