You’ve Inherited Money, Now What Should You Do?

Timothy Brown |

By Timothy Brown, MBA, CFA®, CFP®, RICP®, AIF®

If you’ve recently inherited money, you might be feeling conflicting emotions. Losing a loved one is hard, but inheriting money can be a blessing. An inheritance can improve your financial situation and offer peace of mind, and it can also remind you of your loved one’s legacy and how much they cared for you.

But sometimes people who receive an inheritance don’t know how to properly manage it. In worst-case scenarios, inheritors blow their inheritance in a matter of years or even months, sometimes falling into more debt as a result of overspending. 

To use your inheritance wisely and avoid risking the legacy your loved one left for you, it’s important to approach your inheritance thoughtfully and strategically, allowing yourself time to process this transition and explore the options available to you.

Work Through 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 capital gains taxes 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 from taking an early withdrawal. Regardless of the inheritance you receive, it’s best to contact a financial professional who understands the intricacies of inheritance situations. 

Take Stock Of 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

The most important step you can take is to consult a professional. Receiving objective advice can help curb temptation and ensure you’re not misusing the inherited money. A professional can also help you optimize the inheritance to build a better financial future for the long run.

At Brown Wealth Management, we want our clients to live confidently with their future in mind. An inheritance can help boost your financial security or reach other financial goals, and our priority for our clients is that they never outlive their finances. If you want to partner with a financial advisor who has your best interest in mind, schedule a free introductory call by reaching out to us at (952) 303-6715 or info@brownwealth.com.

About Tim

Timothy Brown is founder and president of Brown Wealth Management, an independent, full-service wealth management company that helps individuals and families prepare for all of life’s milestones and events. With more than 20 years of experience in the financial industry, Tim strives to help his clients live happier, more fulfilling lives with the confidence that they have been good stewards of their finances. Tim has a bachelor’s degree in finance and accounting from the University of Colorado and an MBA from the University of Minnesota’s Carlson School of Management. In addition, he holds a rare combination of credentials: Certified Financial Planner™(CFP®), Chartered Financial Analyst™ (CFA®), AIF® - Accredited Investment Fiduciary™ (AIF®), and Retirement Income Certified Professional® (RIPC®). Tim has been recognized for his hard work by receiving the Five Star Wealth Manager award in both the Mpls.St.Paul Magazine and Twin Cities business magazine since 2013. 

When he’s not working, Tim enjoys spending time in Eden Prairie with his wife, Stacey, and their four children. You can often find him keeping busy by staying fit, pursuing a black belt in Tae Kwon Do with his three boys, assisting kids with Boy Scouts, and attempting to read two books per month. To learn more about Tim, connect with him on LinkedIn.