Americans may be changing their attitudes following the Great Recession. When asked what they would do with a large inheritance, 48% of Americans said they would save it. Only 8% would spend it on things they’ve always wanted.1
These findings might seem surprising, but bear in mind that most of the respondents were probably not actually handling an inheritance at the time of the survey. An inheritance can often be accompanied by a mix of emotions that can be difficult to imagine or anticipate. Grief, excitement, and gratefulness are understandable feelings, but emotion is a frequent enemy of sound decision making.
If you expect to receive, or have already received, an inheritance, it’s usually a good idea not to act right away but to spend some time deciding how to use it to pursue your long-term goals. This may help reduce the role that emotions play in your decisions. Here are some options to consider.
Invest It
Investing represents an opportunity to grow an inheritance and potentially make it last for years. But it’s important to view any potential investment in light of your overall financial situation. If you inherit a large sum, consider how it could influence your overall investment strategy. Depending on your circumstances, a large sum could affect your risk tolerance.
Pay Down Debt
Credit cards can be useful to rent a car or book an airline flight, but carrying large balances on high-interest accounts can harm your financial health. If you have a large balance on a credit card or a vehicle loan, consider paying it off with the inherited money and use the increased cash flow to begin making “payments” toward your retirement or other long-term goals.
Of course, some types of debt, such as a home mortgage, may offer tax advantages. Whether it would be wise for you to pay off your mortgage depends on your individual circumstances and goals.
Give Some Away
Under current law, you can make gifts of up to $13,000 per beneficiary per year without incurring gift taxes. A gift of that size could help fund a college education for a child or grandchild, help a family member get out of debt, or give a young worker in your family a head start on retirement savings. Also, you can give an unlimited amount to your spouse without gift taxes as long as he or she is a U.S. citizen.
Save for Emergencies
It’s usually wise to have an emergency fund that can be used in the event of a sudden loss of income or unexpected expenses. Having three to six months’ worth of income in an emergency fund could help you avoid going into debt or selling investments at an inopportune time to cover unanticipated or sudden expenses.
Inheriting money represents an opportunity. But it may help to view it as a responsibility, too. Managing your inheritance with sound financial strategies could help you preserve it for your future and your family.
1) Gallup, 2010
The information in this article is not intended as Naperville estate planning or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.
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