How to Responsibly Handle an Inheritance: A Step-by-Step Guide
Receiving an inheritance can be both exciting and overwhelming. Here's how to handle it wisely and create lasting value from your windfall.
Keep it private initially
Limit discussion of your inheritance to one or two trusted family members or friends, preferably those who won't expect to benefit from it. This gives you time to process and plan without external pressure.
Take time to plan
While compound interest matters, rushing into investment decisions can lead to costly mistakes. With current Federal Funds rates at historic highs, your money can grow safely in a high-yield savings account while you develop a strategy.
Work with financial professionals
Consider hiring a fee-only, fiduciary financial advisor to:
- Create a comprehensive financial plan
- Prioritize your goals (early retirement, college funding, etc.)
- Develop strategic charitable giving plans
- Make informed investment decisions
- Navigate tax implications
Understand tax implications
No federal inheritance tax exists, but be aware of:
- Six states have inheritance taxes
- Federal estate tax applies to estates over $12.92 million (2023)
- Estate tax rates range from 18% to 40%
- Some states have additional estate taxes
Consider consulting a tax advisor if these might affect your inheritance.
Enjoy responsibly
Once you've:
- Created a financial plan
- Allocated funds appropriately
- Addressed tax considerations
Consider setting aside a portion (around 10% for smaller inheritances) for personal enjoyment, like travel or needed purchases. For larger inheritances, establish a specific amount for discretionary spending.
The key is following this sequence: get professional advice, create a plan, consider taxes, and then enjoy a portion of your inheritance responsibly.
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