Estimates of how much wealth will transfer from baby boomers to younger generations over the next two decades start at $30 trillion and move higher from there. According to the Federal Reserve, about half of all inheritances are less than $50,000. Another 30% range from $50,000 to $250,000. The rest are receiving more, sometimes much more.
The skills required to manage money from an inheritance are different than the skills needed to earn money. And the intelligence and thoughtfulness you bring to managing your newfound assets will determine whether it is a help or a hindrance. Receiving unexpected money affects our emotions in ways both good and bad. It may relieve financial stress, represent new opportunities, or facilitate long-held life goals.
It may also introduce temptations that weren’t present before, or bring long-dormant connections to your front door, perhaps literally. In all these cases, take the time to process the news and think critically about what you want to do next. Following are five steps to follow to manage your windfall.
Assemble your advisory team
While the estate settles, your first meeting should be with a trusted advisor, perhaps a family member, or someone removed from the emotional excitement like a financial advisor, accountant, or lawyer. You may need expertise and guidance to determine how to take some proceeds. An unrelated advisor can bring a detached perspective to the funds and offer advice on steps to consider. Ideally, you would have a trusted group of advisors offering counsel, allowing you to take in their suggestions, filtering the best and most sensible ideas to the top for action.
Some inheritances will come with tax obligations depending on your decisions or where you live. If this applies, calculate and set aside associated taxes in a separate account. In doing so, they will be available when it comes time to pay the IRS. Further discussions about the next steps will then only consider the net amount you will keep. Many inheritances transfer through retirement accounts. Pay taxes only when due and avoid penalties by educating yourself on the tax rules surrounding inherited IRAs.
Create or update your estate plan
If you had an estate plan before, update it. Account for the additional resources for which you are now responsible. If not, now is the time to create those documents that spell out your wishes for the assets when you are gone. Gifts originally intended following your death may now be accelerated during your lifetime.
Keep your job, at least for now.
In most cases, it is best to have the new job lined up before you quit the old one, even after receiving life-changing money. Additional resources offer more options, but if you considered a job change already, wait to make any permanent job decisions until your financial plan comes into focus.
Set aside some just for fun
Use the majority of the money to cover daily expenses and invest for your future. But a little fun is okay too. Keep this to less than 10%, and be diligent about tracking your spending and sticking to that limit. Celebrate your good fortune by doing something you enjoy with the ones you love.