Suddenly coming into money can be thrilling, but a little terrifying. Whether it’s a modest sum or a life-changing windfall, knowing what to do with an inheritance can make the difference between fleeting fortune and lasting financial security.
This guide will walk you through practical inheritance planning strategies so you can honor your loved one’s legacy while setting yourself up for a stable future.
Avoiding Common Inheritance Mistakes
Coming into a sudden windfall can feel like winning the lottery, but without the right approach to managing unexpected wealth, it can disappear, fast.
Avoid these common mistakes:
- Spending it too fast: Blowing through inherited money on luxury cars, lavish homes, or risky investments can drain your funds. There’s no shortage of horror stories about people who lost it all in just a few years. Hit pause before making big purchases, and focus on smart money management after an inheritance.
- Forgetting about taxes: Many people forget about the tax implications of inheritance until the bill arrives, and by then, the money’s gone. Always set aside a portion of your funds to cover potential taxes. A tax pro can help you estimate what you’ll owe.
- Trusting the wrong people: Sudden wealth tends to attract “advice” from friends, relatives, and opportunists. Choosing the wrong advice can turn your inheritance into a cautionary tale. Instead, build a team of trusted professionals who can guide you with wealth preservation strategies.
6 Inheritance Planning Strategies
Receiving an inheritance can be life-changing, but only if you manage that money wisely. Follow these inheritance planning strategies to protect your windfall and enjoy financial security.
1. Slow Down and Breathe
Before you rush into big decisions, give yourself permission to do… nothing. Seriously. When you’re figuring out what to do with an inheritance, the best first step is often just pausing.
This is likely an emotional time—you’ve just lost someone important to you—and that grief can cloud judgment. Resist the urge to make impulsive purchases or big life changes.
Instead, assemble a team of professionals to guide your next move. Meeting with an estate attorney, a tax professional, and a financial advisor can help you build a solid foundation for financial planning after an inheritance.
2. Plan for Taxes
Before you spend or invest a dime, make sure you understand the tax implications of inheritance. Taxes vary depending on where you live and what you’ve inherited, and they can eat into your windfall if you’re not prepared.
For example, there’s a federal estate tax, and some states have inheritance taxes, too. If you inherited a 401(k) or IRA, there are specific withdrawal rules, and taking the money out too quickly could mean a hefty tax bill.
In this situation, it’s best to spend a portion of your windfall on professional help. A tax pro can review everything and tell you exactly how much to set aside for taxes.
3. Set Goals
After taking a pause and planning for taxes, it’s time to get intentional about the money that’s left over. Creating short-, medium-, and long-term financial goals will help you turn sudden wealth into lasting stability.
- Short-term goals: Build or bolster an emergency fund so unexpected expenses don’t derail your plans.
- Medium-term goals: Tackle high-interest debt strategically. Paying down debt can free up cash flow and reduce stress.
- Long-term goals: Think big-picture. Use this chance to map out financial planning after inheritance that supports your future dreams, like buying a home, starting a business, or retiring early.
4. Invest Wisely
While you can use some of your inheritance for fun, the bulk of it should go toward long-term stability. Think about investing inherited money in a way that supports long-term stability rather than short-term splurges.
Consider passive investments like diversified stocks, index funds, or bonds. They offer steadier growth and lower risk compared to other options.
5. Update Your Own Estate Plan
If you don’t have a will, now’s the time to write one. Trusts can also be a good idea. They protect your assets and money when you pass away, making it easier to transfer them to your beneficiaries. Online platforms like LegalZoom can help you do this affordably, but consider working with a lawyer if you have a large estate.
6. Leave Room for Joy
Not every dollar has to be tucked away in spreadsheets and investment accounts. Part of smart money management after inheritance is giving yourself permission to enjoy a slice of it.
Set aside a modest portion of your funds for something meaningful, like a trip, a special purchase, or an experience that honors your loved one’s memory. The key is to treat this like a planned expense within your financial planning after inheritance, not an impulse splurge.
Turn Inheritance Into Opportunity
Inheriting money can feel overwhelming, but it’s also an incredible opportunity to create lasting security. By slowing down, setting goals, planning for taxes, investing inherited money, and updating your own estate planning essentials, you can transform sudden wealth into long-term stability.
Remember: good inheritance planning strategies aren’t about saying “no” to everything fun. This approach is about saying “yes” to a future that honors your loved one’s legacy. With thoughtful guidance and a clear plan, you’ll be well on your way to avoiding common inheritance mistakes and building the life they hoped for you.
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