Here's How To Make The Most Of An Inheritance

Jalene Hahn |
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Both of my parents died unexpectedly when I was in my 30s. I found my mother’s death especially painful. For me, it was an emotional as well as a financial transition. I was grief-stricken but grateful for the legacy I was given. My overarching concern was how to be a good steward of my parents’ hard-earned retirement money.

According to economic research conducted by the Federal Reserve using 2018 data, “About half of all inheritances are less than $50,000, and an additional 30% range from $50,000 to $249,000.” Susan Bradley, author of “Sudden Money” and the founder of the Sudden Money Institute, says, “The average inheritance is $90,000, and that really isn’t life-changing.” Yet for some, receiving even a small inheritance, if used wisely, could radically change an individual’s financial situation.

However large or small of an inheritance you receive, proceed with caution. Here are some suggestions experts recommend:

  • Give yourself time to breathe. Bradley recommends “spending your first few weeks, or even months, as a wealthy person in a ‘decision-free zone.’ This gives you time to process your feelings about your situation before you to decide to act. The outcomes of this zone include staying in control, making gradual and logical decisions, understanding taxes, and working through emotions.”

  • Create an advisory team. Your team should consist of a tax professional, fiduciary financial planner and an estate planning attorney. Understanding what you have inherited, how it’s taxed and other constraints will give you a good idea of the magnitude of your inheritance. One of the assets I inherited was a 403(b) retirement account. As a non-financial professional, I knew I needed some advice. After several frustrating conversations, I finally understood different tax treatments and knew what my distribution options were and the implications of each.

  • Take a reality check. Receiving an inheritance is a good time to take a hard look at your current financial situation. While most inheritances will not put your kids through college or rescue an underfunded retirement, they can often be used to help ease a debt burden, shore up your emergency fund or take a family vacation.

  • Define and prioritize your goals. Most experts will recommend paying off debt, funding emergency savings, investing some for long-term goals, and giving some to charity. I also advocate using at least 10% for a splurge. In the rare case that you have a substantial inheritance, it could be time to review and adjust your overall financial goals. Be thoughtful about increasing ongoing expenses and understand how long the money will support those adjustments.

  • Honor the legacy. This was very important to me as I was first working through how I wanted to use my inheritance. Every time I took a distribution, I asked myself, “Would my mother approve?” When my boys were in school, I used the money for enrichment activities, summer camps and school tuition. I would also let the boys know the money came from Grandma Joyce.

  • But don’t be too emotionally attached. I have clients who inherit stocks of companies where their relatives worked, and they have a strong emotional attachment. If it is a small percentage of the portfolio, we will maintain these positions. In other instances, we need to discuss diversification and the risk that concentrated stock puts on a portfolio.

Hopefully, you will not receive an inheritance until your relative has led a long and full life, but whenever it comes, large or small, take some time to appreciate the efforts that went into earning those funds and reflect on how this gift will honor your relative’s legacy as you use it to help improve your financial situation.