Financial Planning Advice for Managing an Inheritance Brought on By the Pandemic

The ongoing COVID-19 pandemic has impacted almost everyone to some degree. For some individuals, the loss of loved ones may have resulted in an inheritance. Most people who receive a smaller inheritance use it to go on a trip, pay off debt, or purchase something they’ve needed. However, those who receive a larger inheritance may be easily overwhelmed with their options. In these uncertain times, it’s easy to worry about making the wrong move, especially with newfound wealth.

The truth is that over the next 25 years or so, over $68 trillion in assets will pass down from baby boomers to younger generations. That’s a lot of money. If you don’t know how to properly manage a large inheritance, then much of that money could go to waste.

“Many people view an inheritance as a much-needed windfall, but the truth is that without the understanding of what to do, a sizable portion of inheritors see either no change in their overall financial situation or experience a decline in wealth. They actually end up worse off than they were before they received the inheritance. That’s why it’s so important that people understand their options and the logic behind wealth management. An inheritance has the potential to change lives and it’s important that people don’t let it go to waste.” Chuck Elhoff Wealth Manager Virtus Wealth Management

Receiving an Inheritance

More people than ever are understanding the importance of estate planning. It’s no surprise considering the number of losses sustained due to the severe COVID-19 impact. Having an estate plan allows them to determine how their assets will be managed, preserved, and distributed after their death. Not only does this allow them to carry out their wishes after they’re gone, but it makes things easier on the family by reducing arguments about who gets what because there’s already a plan in place for who gets specific inherited assets and how they’re divided.

Receiving an inheritance should be a blessing. However, some people view it as a curse because of the complexities. Here are some tips on how you can make the most of your pandemic inheritance.

Honor Their Legacy

While you contemplate what to do with the inheritance, take the time to remember who left it to you. Consider all the work and sacrifice that went into making such a gift possible. How will your decisions honor your loved one’s memory? Keeping this thought in mind often helps people make better financial decisions. That’s not to say you should go out and donate the full inheritance. After all, they wanted you to have it. This concept speaks more to not spending the money frivolously without regard for the future.

Take Your Time

Often when we lose a loved one our judgment can be clouded. This is not the time to make major financial decisions. And, in most cases, there isn’t an urgent need to make any major changes or decisions right away. It’s perfectly acceptable to let the inheritance sit while you grieve. Consider parking the funds in a money market account for a few months while you mourn. When you feel like you’re ready to start managing an inheritance, it will be there waiting for you.

If you’re married, then you should take the time to decide if you want to park the money in an account only in your name or in your name and your spouse’s name. Inheritances are generally considered separate property in marital legal terms, however, if you commingle the funds then that division ends.

Create a Team

Managing inheritance money can be overwhelming, especially since it’s not uncommon for everyone to have an opinion about what you should do with the money. It’s a good idea to build a team of trustworthy professionals to help guide you through your options.

“Don’t let friends, family, or even financial professionals bully you into doing something that doesn’t make sense for your family. We recommend creating a team to help you understand all of your options so you can make the best choice for you and your family. This team should consist of people such as a financial advisor, an insurance agent, an estate planning attorney, a tax attorney, a CPA, and perhaps a real estate agent. You don’t need people to tell you what to do. You need people to educate you on your options and their lasting impact.” Brian Tillotson Wealth Manager Virtus Wealth Management

Inheritance Planning

Before you take any action, it’s a good idea to think about what you want to do with the inheritance, especially if it’s a cash inheritance. When it comes down to it, there are three basic options.

1. Give
2. Save
3. Spend

If you don’t come up with a plan to tell your inheritance where to go, then you’ll end up wondering where it went. Some people prefer to give some money away. If you choose to go this route, then make sure you’re not giving away more than you can afford to give away.

It’s also a good idea to pay off your debt, especially high-interest debt. However, before you do this, you’ll want to make a list of all outstanding debt. This allows you to see how much money is going where and what you’ll have left over. If the inheritance doesn’t cover all of the debt, then you’ll want to focus on debt with the highest interest rates first. The most important thing to realize is that once you pay off that debt, you want to do what you can to avoid accumulating more. Some people even choose to pay down their mortgage.

Under the save category of financial planning, there are a few options. One important option is to create an emergency fund. Having this emergency fund allows you some wiggle room should you find yourself faced with a financial emergency. It can help you from falling back into the debt trap as long as you use the money wisely.

In addition to an emergency fund, you may want to set some money aside for your children and their future. This can be done in a college savings or investment account or in some other way. Speak with a financial planner about your options to decide what will work best for your family.

“Everyone’s financial situation is different. What might be right for one family may not be right for yours. Spend the time considering what you want to do with the money before you take action in case you change your mind or learn about an option you hadn’t known about before.”  Brian Tillotson Wealth Manager Virtus Wealth Management

Build your financial plan before you take action and then let it sit for a few days before revisiting it. Run your plan by your financial advisor or financial planner and see what they have to say. You’ll want to think about how much you want to invest as well. Investing is a great way to strengthen the inheritance money and build upon it.

Investing an Inheritance

There are a variety of ways you can invest your inheritance to provide peace of mind in the future. However, with investment comes tax planning. Some investment options are better than others when it comes to taxes. Inheritance tax planning is an important part of receiving such a gift.

You may decide to max out contributions to your current retirement plans. Depending on your financial situation, you may even want to start new retirement accounts, especially if you haven’t already. Along with retirement planning, other investment opportunities include investing in stocks and bonds, residential and commercial real estate. However, depending on the markets these may or may not be good options. Both the stock market and real estate have moments when it’s better to invest and when it’s not. This is another reason why it’s good to have a team of trustworthy professionals to offer financial advice, professional advice, and legal advice.