Whether you have received a modest or sizeable inheritance, careful planning can help you get the most out of it. Your inheritance might come at a time of loss and grief, so take the time to get advice and think things through before you act on your new financial state.
How to plan for an inheritance?
It’s highly unlikely that you’ll know exactly when you’ll receive an inheritance, but you might know what you’ll be getting ahead of time.
Many people who have planned their estate properly will tell the key people details about their will to ensure that everyone understands what their wishes are. You might feel awkward asking questions when they are talking to you about this, but by asking certain questions you could help clarify a great deal without any fuss.
Questions to ask if you’re expecting to receive an inheritance could include:
- What will you be giving me?
- How will I be getting it?
For example, your loved one might intend to leave you cash, property, artwork, and/or jewelry. Each type of gift will need a different strategy. For example, if you receive antiques, artwork, or property, you might choose to sell these items to free up cash for investing or paying off debt.
If you’re receiving money, will you be getting it in installments over time, or as an upfront lump sum? Will there be conditions imposed on the money? For example, does the person leaving you money say you can only use the money for paying off your mortgage?
You can also think about the tax implications in advance. Australia doesn’t have and New Zealand does not have an inheritance tax, but the so-called death tax could apply to superannuation death benefits. In addition, your inheritance might be a boost to your personal income and hence your tax bill. You could get advice from a tax expert about minimizing your tax bill when the time comes.
The more you plan for your inheritance, the easier it will be when the time comes for managing it.
What to do after receiving an inheritance?
Receiving a windfall doesn’t guarantee financial security, and the temptation is there to spend irrationally.
Take time out
Wait before you make any big decisions. Take time to process things, especially if you’ve lost someone close. If you’ve received money, keep the cash in a high-interest savings account until you come up with a plan. Consider where your inheritance came from and the hard work that made it possible. This could inspire you to manage it in a responsible way.
Get advice and plan
Make sure you utilize experts like financial planners, tax lawyers, and accountants to come up with a plan. Also, consider your current financial situation. How much debt do you have? What should you pay off (high-interest debt like credit cards) and what should you take more time paying off (mortgage)? Have you built up an emergency fund, or should you put some cash towards that?
Set goals and building your wealth
A large inheritance could be life-changing, but if you’ve received a modest inheritance, it probably won’t change your goals. In this case, you should think about how you can use your inheritance to achieve your existing goals more quickly. Prioritize your goals, and address high-interest debt before other goals.
Use your inheritance to build wealth for later and for retirement. You could put more money towards super, invest in stocks and/or businesses directly, buy an investment property, or pursue other investment options. Investing strategies have tax implications, so consult financial planners and tax advisors for help. Financial planners can also help you understand different investment products and their pros and cons.
- Emergency fund
Pay off high-interest debt like personal loans and credit cards. You could use some of your inheritance to also pay down your mortgage or even pay it off completely. If you don’t already maintain an emergency fund, now is a good time to set one up. Your emergency acts as a safety net against life’s uncertainties.
- Fun money
If you have extra money left over after your retirement and wealth-building strategies, why not designate that as fun money? Check off a few items on your bucket list, whether it’s a holiday or a new car. Alternatively, you could donate some money to your favorite charity or contribute to a grandchild’s university fund.
- Estate plan
An inheritance can mean big changes to your financial situation, so take the opportunity to update your own will. An estate plan includes a will as well as for instructions for your personal and financial affairs if you lose the capacity to make decisions.
Keeping your will up to date ensures your assets are distributed the way you intend. It also means you can take care of your loved ones in the way you want. If you leave clear instructions about how you want things managed, you can also reduce the risk of your loved ones getting into financial disputes.
You might only get one inheritance, so you’ll want to manage it well. Take time to assess your financial situation and get advice from a team of experts. By doing so you’ll respect the legacy of your loved one, and you’ll ensure their gift is used in a responsible way to achieve your goals.
Luke Fitzpatrick is an academic speaker at Sydney University via Glecture. He enjoys writing about tech, productivity, lifestyle, and is a contributor to Forbes.