How to Handle a Large Inheritance

Inheriting a large sum of money or assets can be a life-changing event. While it can bring financial security and opportunities, it can also be overwhelming financially and emotionally. Whether you have recently received a large inheritance or expect to receive one in the future, it is important to take certain steps to handle it wisely.

What is considered a large inheritance is a subjective matter that differs from person to person. Irrespective of the quantum of wealth you inherit, you may want to make sure you utilize the amount in the best possible way while also honoring the legacy of the person who left it behind for you. It is advised that you consult with a professional financial advisor who can guide you on how to manage a large inheritance. 

This article discusses what you can do with your inheritance and what steps you can take to manage your inherited wealth. 

What to do with an inheritance

Receiving an inheritance can be a reminder of the person who passed away. It is important that you process your feelings and reflect on what this means to you. Take the time out to grieve. Seek support from family and friends or consider speaking with a therapist or grief counselor.

When you receive an inheritance, you have to decide how you are going to utilize the funds to avoid mismanagement or misuse. An inheritance is a blessing and an opportunity to secure your financial life. If the inherited funds are spent on unplanned purchases and unnecessary lifestyle upgrades, you might miss out on an opportunity of a lifetime to make the money work for you. Instead, you may want to work on creating a financial plan that balances your needs with your wants. That way, you can make sure the essentials are met, and you also get to enjoy your inheritance.

Here are a few good options to consider:

1. Pay off your debts to become financially free

Paying off your debt is one of the first things you can consider doing on receiving a large inheritance. Getting rid of your debts not only makes you financially free but also reduces the mental burden on you.

Start by paying off the high-interest debt, such as outstanding credit card amounts or student loans, if you have any. This will free up the extra amount you are shelling out as interest payments, and lower your financial burden. You can also consider paying your mortgages, bringing yourself closer to financial freedom.

However, you may want to consult with a financial advisor before paying off debt, as they can help you determine if this is the best use of your inheritance.

2. Build an emergency fund to tide through unexpected tough times

Building an emergency fund can go a long way in providing financial support during uncertainties. You may want to set aside a part of your money, generally, an amount worth three to six months of your expenses. One option is to keep this amount in a high-yield savings account from where it is easily accessible.

This emergency fund comes in handy if you face unexpected expenses, such as medical bills. You can also use this fund as a failsafe should you experience tough times with your career or employment.

3. Make investments to grow your corpus

Investing is the best way to compound your wealth. While a large inheritance may be tempting, it is better not to bank entirely on it for your future financial needs. In fact, investing is absolutely essential in the times we live in. Know that investing is not the same as saving. Investing is where you lock your money away for a predestined period of time (called investment horizon) and the money compounds there.

Factors such as inflation are at work in the economy, reducing the value of money over time. Look at it this way – The cup of coffee that cost you $1.99 a decade ago, is probably costing you $5 today. This rise in the price of goods and services is called inflation, and the rate of growth in inflation in the US is presently high. What this means is that the cost of living is going to skyrocket in the future, education will continue to become expensive, and the cost of medicine might blow over in your retirement. Investing a slice of your large inheritance will help you to generate more wealth to add to your corpus that can help you retain your lifestyle and live a comfortable retired life.

Be sure to work with a trusted financial advisor to help you make informed investment decisions. Assessing your risk appetite and risk tolerance will help you get an idea of the kind of investments that will best suit your profile. Diversifying your portfolio will allow you to minimize your risk while maximizing your returns.

Investment options for you to explore:

1. Shares: You can invest in the shares of companies. Selecting blue chip stocks, which are shares of profitable, reputed, and established companies, can generate potential good returns. Consider spreading your investment in companies operating in different sectors or industries. Staying invested for longer time periods will help you tide over short term market fluctuations and fetch higher returns. Assess your risk appetite before investing.

2. Government securities: Government-backed securities, such as treasury bills, are a popular investment choice amongst risk-averse investors. This is because these are fixed income investments that are unaffected by market fluctuations, and the returns are guaranteed on maturity. If you do not want to risk your funds and deal with market volatility, this may be a good option to grow your wealth.  

3. Mutual Funds: Mutual funds are pooled investments that are professionally managed, allowing you to grow your wealth without having to be hands-on. Speak to your financial advisor to help you pick a mutual fund with a good performance record. You may then invest in it and let the fund manager of the mutual fund find ways to maximize your returns while minimizing your risk from the equity exposure.

4. Real estate and REITs: One of the popular asset classes that people with large investable assets such as a large inheritance, consider, is real estate. You may assess the suitability of this kind of investment to your financial goals by seeking advice from a financial advisor. Property can either be rented out, establishing a steady stream of passive income or you may choose to live in it, not having to pay rent yourself. You may choose to sell at a later time when capital appreciation seems appropriate. One problem with this option, however, is that it is an illiquid investment, meaning, you cannot quickly sell it off to get cash. Alternatively, you may consider investing in REITs (Real Estate Investment Trusts) within the same asset class. These are companies that own real estate that generate income, such as agricultural land or multi-family real estate. They are liable to pay 90% of the income generated from the property to the shareholders. This is beneficial as you can sell and buy REITs quickly instead of actually buying the property.

5. Gold: Investing in gold and other precious metals, such as silver, can help you reduce your overall risk. This is because the value of gold tends to move in the opposite direction as the shares in the stock market, i.e., if the stock market is falling, chances are that gold will appreciate in value. Investing in gold and other precious metals safeguards your funds and helps mitigate losses. Also, gold is known as a storehouse of value – the value of gold does not depreciate.



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4. Contribute towards your retirement

The earlier you start saving for your retirement, the more time your money gets to grow in your account, and the larger is your corpus when you withdraw. This helps ensure a comfortable life during the golden years of your life. While you may have already started saving for retirement, an inheritance may be a game changer for you. You may want to revisit your retirement goals and see if you can upgrade your retirement lifestyle than you had previously accounted for. Make sure to speak with your retirement advisor or financial advisor before you make fund allocations.

While you can only contribute earned income to retirement accounts such as 401(k) accounts and traditional and Roth IRAs, there are other ways to save for retirement. Consider contributing to HSAs if you have a high-deductible health plan. These accounts allow you to grow your savings tax-free and withdraw your savings without attracting taxes (if you use it for qualified health expenses). The contributions are also tax-deductible. In 2023, the contribution limit has been set at $3,850 if it’s for self-coverage and $7,750 for family coverage. Talk to your advisors for more options.

5. Save money for future investments

You can keep some money aside for any big future events where you may need to shell out a large sum of money such as your children’s wedding or their college tuition. To fund your child’s higher education, you may consider contributing to a college savings plan. These plans are tax-deferred, and the withdrawals from these accounts are tax-free. Moreover, you may even get a deduction against your contribution to this account. However, every state doesn’t provide this deduction, so make sure you check the eligibility criteria before investing in it. 

6. Spend money on what makes you happy

Responsibilities are always going to be a part of our living. But that does not mean that you cannot enjoy life a little. You can spend some amount on things that make you happy. Take that dream vacation, or invest to learn a new skill. If giving back to your community or supporting a cause is important to you, consider donating a portion of your inheritance to a charity or foundation. This can help you make a positive impact on the world and leave a legacy.

What happens when you inherit money is up to you. But before you go and spend your inheritance, keep in mind that once this money is gone, it won’t come back. Ensure that you have chalked out a budget and a financial plan with help from your financial advisor. Use your money wisely.

Here are a few other things that you may want to give attention to while handling a large inheritance.

Things to keep in mind when handling inheritance

There are certain things you should consider when handling a large sum of inheritance. These are:

1. Do not make financial decisions in a rush

Financial decisions should not be made hastily. They require thorough planning and research so that the money is used wisely. Do not complicate the situation for yourself by making money-related decisions while grieving. Take your time to mourn the loss of your loved one before you jump into handling the inheritance.

Till then, you can choose to keep the money in a secure place, such as a bank that is federally insured. Each of these banks provides a standard insurance of $250,000 per depositor. If you have received a large inheritance, you can spread the amount across multiple such banks.

You may also receive assets, such as house property, jewelry, retirement accounts, shares, or a stake in a business. Work with an estate executor to transfer everything in your name seamlessly.

You may be wondering how long does it takes to get inheritance money. The legal proceeding through which the estate is transferred, known as probate, takes time. So proceed with patience and caution.

2. Seek expert financial advice

There really are no two ways about this – getting professional advice can help you make better financial decisions. You may have a number of questions in mind. Clear all your doubts with the advisor, even if they are as basic as ‘how do you receive inheritance money?’. Clearing your confusion can go a long way toward making informed decisions.

While you may be comfortable making your own decisions, there may be rules you are not aware of. You may also need to seek assistance from tax advisors, real estate agents, and estate planning attorneys. You may consider hiring a fee-only financial advisor who does not earn commission for selling investments and may be a great choice to engage with in case of large inheritances. Assess the suitability of the advisors and make an informed choice. Note that engaging with an advisor is an investment, not an expense. The returns you may get are worth the time and effort you may need to invest.

3. Honor the legacy of your benefactor

What you inherit may be something that has been passed down for generations. Or it could be the outcome of the immense hard work of your parents or grandparents or benefactor. Before taking any decision, keep in mind how it will impact the legacy and the memory of your loved one. This sense of accountability and responsibility will guide you to make better decisions while handling your inheritance.

To conclude

Inheriting a large sum of money can be overwhelming and managing it can be challenging. If you are wondering what to do with inherited money, you may want to first create a financial plan. It is important that your plan aligns with your goals and values. Start with paying off any debts you have on your books so that you attain financial freedom, and then look to make investments, possibly in diversified assets. Do not skip on setting up or making a generous contribution to your emergency fund. Retirement plans may come in next. Once your necessities and essentials are met, you may also spend some money on things you enjoy. 

Do not rush the process, and honor the legacy of your ancestors while making decisions. Consider engaging with a financial advisor who can guide you in making informed choices and help you navigate the complexities of managing a large inheritance. Engaging a financial advisor can provide peace of mind and ensure the long-term sustainability of your wealth.

Use the free advisor match tool to match with experienced financial advisors who can guide you effectively on how to manage a large inheritance. Answer a few simple questions based on your financial needs, and the match tool will help connect you with 1-3 financial advisors that are best suited to help you.

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