Dos and Don'ts When You Get an Inheritance

By Jeannie Bidner, CFP?

Seven years ago, my husband's grandmother passed away and left him an inheritance of $20,000. My husband quickly decided he wanted to buy a boat with that money. I remember saying to him: "Whoa, don't you think we should talk about this first? I can think of so many things to do with $20,000."

It quickly turned into a philosophical discussion about how we think about money. He felt that because this money came unexpectedly and was unearned, it was "play" money. I felt like the money could give us the opportunity to pay off debt or contribute to our two-year-old daughter's education savings account (ESA).?Ultimately, and even though it was a split decision, he bought the pontoon boat.

My husband's inheritance is part of a larger societal trend. You may have heard the term "the great wealth transfer." Between now and 2045, the Baby Boomer generation is expected to transfer more than $53 trillion to their heirs, according to Cerulli and Associates.

While most of these inheritances are likely not on the scale of the fictional billions inherited on the HBO show Succession, it can still be important to create a thoughtful plan for how you will handle an inheritance. And if you have a partner, that includes having a conversation with them to align your priorities. When you are in a partnership, I believe how you manage money, including an inheritance, should be a team decision. In most cases, it tends to lead to better outcomes when you talk things through together.

Dos and don'ts to consider if you receive an inheritance.

Don't be impulsive. If you are fortunate enough to receive an inheritance, buy a nice bottle of Champagne and make a toast in honor of your benefactor. Then hit the pause button before you start spending. This is a time to reflect. While you are likely to be grieving, don't react emotionally with the money. Consider setting a time period before you start spending—like three months—to give you time to review your financial picture, prioritize your goals, and speak with professionals. You could hold the inheritance in a high-yield savings account as you take a few months to develop your plan of action.

Do review the current state of your financial picture. Do you have non-deductible, high-interest debt like on credit cards? If yes, think about putting this at the top of your list to pay off. Do you have an emergency fund to cover at least three months of essential living expenses? If not, add that to your list. The actions you take to ensure your current financial situation are in good order can help set you up for future financial success.

Do reassess your intermediate and long-term goals. Depending on the size of the inheritance, using the funds strategically could help create the financial future you always imagined. Do you want to use a portion of it to help save for a child's education, or save for a down payment on a house, or pay down student loan debt? Are you contributing to your company's retirement plan at a minimum up to the employer match, or will this inheritance allow you to contribute the maximum allowed to tax-advantaged retirement accounts like an individual retirement account (IRA) or 401(k)? Add these items to your list.

Do talk to professionals. The larger the amount of money you inherit, the more helpful it can be to talk to a professional. Even if you consider yourself financially savvy, it can be useful to have a second set of eyes on your finances. I am an expert, and I use a financial advisor. They can review your overall financial picture, help you think holistically, and offer guidance on specific investing vehicles. Talk with a tax advisor who can also help you understand the implications of any income or inheritance tax you may be subject to and offer insights on the tax implications regarding the sale of property, like a family home. Everyone, no matter the amount of money in their bank account, can benefit from professional guidance.

Do consider using a portion to honor the decedent. The passing of a loved one is an emotional time, and doing something special to honor that person's life can help in the grieving process. Explore ways you can use a portion of the inheritance to honor your benefactor, whether it's an experience in their memory, like a special family vacation, or a piece of jewelry that signifies their life. Or, in our case, a boat.

Remembering Grandma

This inheritance from my husband's grandmother has allowed us to create memories and a tradition of being together as a family. It represents summer and the joy and calm that comes with the kids not being in school. It has given us more fulfillment than I could have imagined, and that's the true gift left behind by my husband's grandmother.

Fifty-five percent of Americans said spending money now to have more experiences is a better description of wealth, versus 45% who would sacrifice experiences now to save money for later, according to the 2023 Schwab Modern Wealth survey. When my husband received this inheritance, he was clearly in the 55%, while I was in the 45%. Now, after seven summers of enjoying our boat and appreciating the time we spend as a family at the lake, I know this was the right decision for us.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

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