The receipt of an inheritance often comes at a very emotional time. Still coping with the death of a loved one and now finding yourself with a financial windfall can be overwhelming. Before making any quick decisions about the sum of money you’ve received, it’s important to take a long-term approach. Start by getting a detailed understanding of the types of assets you will be inheriting (cash, securities, real estate, etc.). You can then take an assessment of your current financial situation and begin to address any weaknesses that might exist.
Some areas to look at:
Taxes – It’s important to consult with an accountant or tax professional to see if any taxes must be paid. Several states, including New Jersey, have an inheritance tax imposed on certain benefactors of a deceased person’s estate.
Pay off debt – Look to pay off any high-interest debt that you might be carrying (credit cards, car loans, etc.). While a low-interest mortgage may have some tax benefits, paying it off might be a worthwhile option, especially if you are retired or nearing retirement. This can help to alleviate the psychological burden of having a monthly payment without a steady salary.
Retirement – Have you saved enough for retirement? Investing your inheritance might be a good way to boost your overall retirement savings.
Insurance – If you have inherited expensive jewelry or artwork, you should review your property and casualty insurance to make sure you are adequately covered. You may need an appraisal of the items you have inherited to determine how much coverage you need.
Education Planning – Contributing to a college savings plan or paying tuition bills directly is an option to fund a child or grandchild’s higher education.
Once you have covered these primary areas in your financial plan, you might consider some of these alternative uses for your inheritance.
Charitable Giving – Support your favorite charitable organizations through direct contributions or a charitable trust. You might also receive a tax benefit for your philanthropy.
Vacation Home – Not only can it be a source of enjoyment during your lifetime, but with proper planning, it can be passed down for future generations to appreciate. The cost of carrying a second home should be carefully evaluated before taking on the purchase.
Everyone’s situation is unique. Remember that decisions don’t always have to be made immediately and taking some time to reflect has a way of settling emotions. Addressing any gaps first in your financial plan will help you maximize the impact of your inheritance and help put you on the path to long-term financial stability.
Consulting with your financial advisor or other trusted professionals can help put things into perspective.
The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual.