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ME TIME Midlife Podcast

Angela Dorsey is a guest expert on ME TIME Midlife Podcast discussing what to do if you get an inheritance.

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What do you first tell your clients when they receive an inheritance? 

The first thing I tell my clients is to Pause. Slow down. This may be a once-in-a-lifetime chance to achieve certain financial goals and you want to make smart decisions and honor the person who gave you the money. 

 As a woman, when you receive an inheritance, you may experience a wide range of emotions. You’re saddened at the personal loss that has led to this gain. You’re happy to receive whatever you have and how you can use the money.

 Your first instinct may be to rush out and buy that nice car you’ve had your eye on for years; however, before you make any large purchases, you might want to slow down and think about what good you can do with the money received. If you inherit a large amount of money, take your time in deciding what to do with it.

What should you do with the money while you are making your decisions? 

A federally insured bank or credit union account can be a good, safe place to park the money while you make your decisions. Your money won't earn much in the way of interest, but, as long as you stay under the legal limits which is $250k per bank, it will be safe until you decide what to do with it. 

If you receive other kinds of assets, such as securities, IRA accounts, real estate, or an interest in a business, you'll need to work with the executor of the estate to get everything properly transferred into your name. 

Note, too, that even if you’re in a hurry, getting what's due you can take time. Probate—the legal process through which an estate's assets are distributed under the guidance of a court—can take anywhere from weeks to years, depending on the complexity of the estate and whether anyone challenges the will. On average it takes about nine months.

What would be the first thing to consider doing with the money? 

Paying off high-interest debts, like credit cards, car loans, is a great first option to use for an inheritance. Depending on the size of your inheritance, there may be no excuse for continuing to carry large amounts of unsecured debt, paying tons of interest. If you have such debt, you may want to start by looking at how best to approach paying it down. You can pay off credit card balances, car notes, and mortgages with your newfound wealth. 

How to best help others with the money? 

Take care of your immediate family. A great goal would be to pay forward the legacy you received. Your immediate family may not have needs right away. However, you should start to think about the future, especially if you have children. 

Think about college, student loans, down payments on homes. Gifts have tax implications like charitable donations, so it’s something you will want to talk about with a financial planner. For example, in 2022 The gift tax exclusion is $16,000 per recipient. Also think about worthy charities.

What about Investing some of the money?

Hopefully, you are thinking of savings, Roth IRAs, and other investment strategies upon receiving an inheritance. You can also invest in other ways, like purchasing a new home or rental property. Of course, you'll want to balance any investments with debt reduction as well. Be sure to put the money you invest in a trust. If you are married, put the Trust in your name only. I recommend consulting with a fee-only financial planner on how to best invest the funds.

What are the tax consequences?

You generally won't owe tax on money you inherit, but other inherited assets—such as securities, retirement accounts, or real estate—can have tax implications. Unless you inherit a great deal of money, you probably won't have to worry about federal estate taxes. In 2022, for example, those kick in only on estates worth $12.06 million or more.

Any last thoughts?

Finally, don’t feel bad if you want to spend some of your inheritance on yourself or your loved ones. It's your money now. But it's worth remembering that once it's gone, it's gone, while if you invest sensibly, you'll have it for years to come. You might even be able to pass it down to your own heirs someday. 

If you receive a large inheritance, it can make a positive difference in your life if you use it wisely. But don't feel rushed into making any decisions and seek professional advice if you need it. If you reach out to a financial planner be sure to work with a fee-only financial planner.