By Lee Sherbakoff, CPA/PFS, CFP®, RICP®
You’re likely experiencing a range of emotions regarding your newly acquired inheritance. Losing a loved one is painful, but inheriting money can be a blessing. An inheritance can improve your financial situation and bring peace of mind—it can also be a reminder of your loved one’s legacy and their love for you.
Sometimes people who receive an inheritance don’t know how to properly manage it. In worst-case scenarios, the inheritance is blown in just a few years or even months—sometimes leaving the inheritor in more debt as a result of overspending.
To use these new funds wisely and avoid risking the legacy your loved one left for you, it’s important to approach your inheritance thoughtfully and strategically, and to allow yourself time to work through this transition and explore the options available to you.
Process the Loss of Your Loved One
Before making any decisions about the money, you need to process the loss of your loved one. Failing to deal with your grief can result in emotional spending that compromises the money you’ve just received. If you give yourself some time, you may become more sensitive to your loved one’s wishes or have the chance to clear your head of complex emotions.
If your loved one spent their life building and protecting their wealth, they probably hoped you’ll do the same. Letting your inheritance sit for a minute can help you overcome the initial temptation to splurge on something like a fancy vacation or expensive new home. If it’s important to you to honor their legacy, don’t forget to take care of your own emotions to protect the wealth they’ve gifted to you.
Understand the Type of Inheritance You’ve Received
It’s also important to consult a professional so you understand what type of inheritance you’ve received. Common types of inheritances include:
- A trust account or cash
- A retirement account such as an IRA or 401(k)
- A house or other property
Knowing the category of inheritance you’ve received impacts how you access the inheritance, any taxes that may be associated with it, and what your options are to move forward.
For example, if you inherit a home but don’t want to live in it, you may need to learn more about the local real estate market and recent sells in the area before deciding to sell the property. If you find that a capital gains tax would be too costly, you might explore another option, such as renting out the house or living in it temporarily as you assess your situation.
Likewise, inheriting a retirement account comes with its own set of obstacles, including potential penalties for failing to take required minimum distributions. Regardless of the inheritance you receive, it’s best to contact a financial professional who understands the intricacies of inheritance situations.
Evaluate Your Financial Situation
Once you understand the type of inheritance you’ve received, you’re better equipped to align your plans for the inheritance with your other financial goals.
For example, if you have high-interest debt to pay off, you could improve your financial situation by paying down that debt with money from the inheritance. If your emergency fund could use a boost, set aside a portion of the money to better protect yourself from unexpected life events.
If you’re debt-free and already have a comfortable emergency fund, there are other areas in your life you may need to catch up on, such as:
- Contributing to your retirement account
- Paying down your mortgage
- Saving for your children’s college education
- Giving to a charity or foundation you care about
And finally, it’s okay to treat yourself to a little bit of a splurge when you inherit money. Of course, it’s probably not a good idea to quit your job or purchase property you couldn’t comfortably afford otherwise. Ultimately, your lifestyle shouldn’t change too much when you receive an inheritance. Instead, your inheritance should complement and contribute to your overall financial goals.
Consult With a Professional
It’s always wise to consult with a professional when you find yourself at a financial crossroads—even more so when emotions are involved. The objective advice from a knowledgeable financial advisor can help curb temptation to overspend or spend unwisely, and ensure you’re not misusing your inherited funds. A professional can also help you look at your options from a variety of angles, optimizing the inheritance to build a better financial future for the long run.
We at The Nalls Sherbakoff Group strongly believe money is a tool, not a solution, to help you feel confident about your future. Our goal is to help you use your inheritance to increase financial security and execute your overall financial plan so you can achieve sustainable long-term, real-life returns that meet your most important financial goals and objectives.
If you want to partner with a financial advisor who has your best interest in mind, don’t hesitate to reach out. Set up a complimentary appointment so we can see if our services are the right fit for you by calling us at (865) 691-0898 or contacting us online.
Lee Sherbakoff is principal and financial advisor with The Nalls Sherbakoff Group, LLC, an independent, fee-only financial planning and investment management firm. He specializes in serving pre-retirees and retirees, helping them create and execute financial plans and retirement income plans that lead to sustainable long-term, real-life returns that meet their deepest and most important financial goals and objectives. Lee has a Bachelor of Science in Finance from The University of Tennessee and a Master of Strategic Studies from the U.S. Army War College as well as the Certified Public Accountant (CPA), Personal Financial Specialist (PFS), Certified Financial Planner™ (CFP®), and Retirement Income Certified Professional (RICP®) credentials. Lee spent over 31 years in the U.S. Army Reserves, including serving at the Army’s highest levels on the Department of Army staff at the Pentagon and being deployed in support of Operation Desert Storm (1991) and Operation Iraqi Freedom (2008-2009). When he’s not loyally serving his clients, Lee enjoys giving back to the community and to his profession, acting as a council member of the Tennessee Society of CPAs and a member of the American Institute of CPAs. In addition, he is past President of the Knoxville Chapter of Tennessee Society of CPAs and past President of the East Tennessee chapter of the Financial Planning Association. To learn more about Lee, connect with him on LinkedIn.
DISCLOSURES: The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.