What to Do with Your Inheritance

The sudden economic windfall of receiving an inheritance presents new opportunities. But if you’re not careful, you may find the money gone as quickly as it came. In this blog post, we’ll share ideas on who to consult about your inheritance, mistakes to avoid, and what to do with your inheritance.

Who to Consult 

Many heirs quickly discover that everyone from the next-door neighbor to your estranged second cousin has an opinion on how to use the money. Creating a trusted team of advisers is crucial to making optimal choices when it comes to your inheritance.

A few of the key players on your consultant team may include:

• An estate planning attorney who can help you set up an estate plan, if you haven’t already done so, to ensure your own estate will be distributed as you intend
• A Certified Public Accountant (CPA) or tax advisor who can advise you on minimizing taxes associated with your inheritance
• A financial advisor or financial planner who can help you craft a strategic financial plan for spending, saving, and/or investing the money 
• A real estate agent, especially if you inherited real estate or plan to use the inheritance to purchase real estate

Looking for a highly recommended, experienced professional in any of these areas? Check out our firm’s Referral Hub. 

Inheritance Mistakes to Avoid

We’ve seen heirs make plenty of mistakes over the years. Here are some major pitfalls to avoid:

• Overlooking taxes: You may be wondering: Is inheritance taxable? California doesn’t have a state-level inheritance tax, and it’s rare for a beneficiary or heir to inherit enough to trigger the federal estate tax. Plus, the IRS does not consider inherited funds to be income.
  
  But remember that any interest or capital gains on investments you make with the funds may be subject to taxes. Be sure to seek the counsel of a CPA on how to best handle taxes. 
• Quitting your job: An inheritance may enable you to accomplish financial goals you wouldn’t normally be able to achieve. But don’t quit your day job just yet! Most heirs do not receive enough money to achieve permanent financial independence. 
• Splurging on indulgent purchases: Your inheritance is yours to spend, and there’s nothing wrong with doing something nice for yourself, your children, or your family. But before heading straight to the luxury car dealership, consider consulting an experienced financial planner to create a smart, comprehensive, long-term plan for your newfound money.

How to Use Your Inheritance

When it comes to deciding how to spend your inheritance, the options are almost limitless – and you may wish to utilize more than one method. Here are a few ideas to help you get started.

• Get Out of Debt: If you have high-interest debts like credit cards or personal loans, using part of your inheritance to pay them off could help you become debt-free. Saving that interest may be the best investment you can make! 
• Purchase a Home or Pay Down Your Mortgage:  If you’ve been saving up to purchase a home, you may wish to use your inheritance as a down payment. If you’re already a homeowner, paying down your mortgage could save thousands in interest. 
• Start an Emergency Savings Fund: An emergency fund typically consists of three to six months’ worth of your household expenses, placed in a high-interest savings account. Establishing a financial cushion to protect you in case hard times arise can bring you peace of mind. 
• Invest It – Wisely:  Instead of spending your inheritance, you may prefer to invest it in a retirement account like a Roth IRA or traditional IRA and watch it grow over time. A trusted financial advisor can help you create your ideal investment profile if you’re interested in this option. 
• Contribute to Your Kids’ College Fund: If you’ve fallen behind or haven’t started saving yet for your children’s college fund, you could put some of your inheritance into an Education Savings Account (ESA), a 529 Plan, or a UTMA/UGMA (Uniform Transfer/Gift to Minors Act) to catch up. 
• Give Some Away to Charity: Our firm believes strongly in the power of giving back. Donating generously to your favorite nonprofit is a noble way to use your inheritance to leave the world better than you found it. 
• Do Something Fun For Yourself: It’s alright to set aside a small portion of your inheritance to do or purchase something you normally wouldn’t be able to afford. Consider first how many of the worthy goals above you’ve already accomplished when deciding how much to set aside.

If you have any questions on what to do with your inheritance or need a referral to a trusted professional, feel free to contact our office.

Law Offices of Daniel A. Hunt

The Law Offices of Daniel A. Hunt is a California law firm specializing in Estate Planning; Trust Administration & Litigation; Probate; and Conservatorships. We've helped over 10,000 clients find peace of mind. We serve clients throughout the greater Sacramento region and the state of California.