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You’ve Just Inherited a Windfall—Now What?

Inheriting a Windfall

Inheriting a windfall may seem like the answer to all of your financial problems. Yet sudden wealth is often a double-edged sword.

While money certainly allows you more freedom, it can also create new problems if you aren’t prepared to manage it. Fortunately, there are steps you can take to protect, preserve, and grow your newfound wealth, whether you’ve been anticipating it, or it comes as a complete surprise.

Consider taking these steps After inheriting a windfall:

1. Set Your Funds Aside for a Few Months

Though you may be anxious to put your new wealth to work, the best first step after inheriting a windfall is often to do nothing at all. This is especially important if the inheritance substantially changes your net worth. It may take a while to get comfortable with your new reality.

A conservative rule of thumb is to leave the inheritance untouched for at least 90 days. During that time, you can begin to assemble your wealth management team.

2. Determine the Tax Consequences

As Benjamin Franklin famously said, “Nothing is certain except death and taxes.” If you come into a large sum of money, it’s important to understand the potential tax consequences before making any big decisions.

A CPA or financial planner can help you determine your potential tax liability. In addition, they can recommend strategies to minimize the taxes you owe.

3. Eliminate High-Interest Debt

Once you come to terms with your newfound wealth and understand the tax consequences, you can focus on setting financial goals and developing your wealth plan. Typically, a good first step is to eliminate high-interest debt.

If you have so-called “bad debt” like credit card or other high-interest loans, paying it off with a portion of your inheritance can reduce financial stress and save you money over time. Additionally, if you have student loans you’ve been carrying for a while, now may be a good time to pay those off once and for all.

Having too much debt can create a variety of financial challenges. However, that doesn’t mean you need to eliminate all debt. For example, if you’ve locked in a low interest rate on your mortgage, you may want to focus on other financial priorities before paying off your home.

4. Check Your Emergency Savings

No matter your net worth, it’s important to have cash set aside for unexpected expenses and potential setbacks. Tying your wealth up in investments and illiquid assets can create difficulties if you need cash quickly.

Though most financial experts recommend having three to six months of living expenses in emergency savings, this is a broad rule of thumb. Consider consulting with a trusted financial advisor to determine how much cash makes sense for you.

5. Maximize Tax-Advantaged Accounts

Whether you’re working or not, tax-deferred retirement and health savings accounts can be useful tools for preserving more of your wealth long-term. Be sure to review which accounts are available to you and maximize their benefits.

If you’re still working, you may now have an opportunity to supplement your income with your inheritance so you can max out your retirement plan contributions. In addition, individual retirement accounts offer meaningful tax benefits, especially if you plan to invest long-term.

Lastly, health savings accounts (HSAs) offer unique tax savings as you can contribute, invest, and withdraw your funds tax-free, so long as you use them on qualifying healthcare expenses. However, not everyone is eligible to open an HSA. If you have a qualifying high-deductible health plan (HDHP), you may want to explore this option.

6. Invest for Your Financial Goals

When you come into sudden wealth, it’s not unusual for long-lost friends, family members, and other acquaintances to come out of the woodwork looking for opportunities to prey on your good fortune. While you may be tempted to invest in their startup or investment scheme, remember: if it seems too good to be true, it probably is.

Instead, start by creating a list of financial goals. For example, do you have young children you’d like to send to college? Do you want to stop working altogether or buy your dream vacation home?

Then, work with a trusted financial advisor to develop an investment plan that helps you achieve these goals without taking on unnecessary risk. This approach may not seem as exciting as investing in a friend’s startup venture. However, you’re more likely to preserve and grow your wealth following a disciplined investment plan.

7. Treat Yourself

Having a plan for your wealth is important. However, money should also be enjoyed. If there’s something you’ve always wanted to do but money has been an obstacle, now is the time to make those dreams come true.  

Perhaps you can finally take that exotic vacation you’ve been thinking about. Or your dream car is suddenly within reach. There’s nothing wrong with treating yourself. Just make sure you consider your long-term game plan, too.

Bottom Line: If you’re inheriting a Windfall, Manage Your Wealth So You Can Enjoy It Long-Term

Inheriting a windfall can be exciting and daunting at the same time. These steps can help you set yourself up for success, so your newfound wealth lasts through your lifetime and beyond.

If you anticipate an inheritance or other windfall or have recently come into sudden wealth, speaking with a fiduciary financial advisor like Sherwood Wealth Management can help. We specialize in the unique financial planning needs of inheritors and sudden wealth beneficiaries and always put our clients’ needs first. Please schedule an introductory consultation to see if we may be a good fit to help you manage your wealth.