Inheriting a significant sum of money can be bittersweet, since it’s usually acquired while you’re grieving the death of a loved one. What’s more, the financial and legal complications that often accompany an inheritance can make it seem more like a burden than a blessing. Making sure the money doesn’t disappear as quickly as it arrived requires patience, discipline, and a sound financial plan.
Following are five guidelines for navigating the inheritance process and making the most of a gift from a loved one:
- Take time to heal: Don’t be pressured into making important financial decisions while you’re still overcoming your loss. Be extra careful if you’re engaged in stressful military operations at the time. Leaving the money untouched for several months—or even a year—is better than making an uninformed choice that you’ll regret later.
- Assemble a team: If the estate goes through probate, it becomes a matter of public record. This could prompt calls from unscrupulous “advisors” or “charities” requesting donations. Take time to assemble a team you can trust to address legal, tax, and investment implications. You may find that the benefits of hiring an attorney, a tax accountant, and a financial planner outweigh the costs of going it alone. Do your research and learn how each person is compensated. Steer clear of those who earn commissions. Also keep in mind that some life insurance companies provide a complimentary financial plan to beneficiaries.
- Beware the tax man: Many people are surprised to learn about potential tax implications when it comes to an inheritance. For 2005, Uncle Sam taxes estates worth $1.5 million or more. This includes everything the deceased owned—not just savings and investments. Assets can add up quickly, so be prepared. Some states also assess an additional estate tax or inheritance tax. There may not be much the heirs can do to avoid taxes, but anticipating them can ease the blow.
- Secure your own financial well-being: Most parents want their kids to enjoy the money they leave behind. But parents also want their heirs to make responsible decisions about securing their financial future. Before springing for a luxury vacation or a new car, consider paying off debts, shoring up an emergency fund, assessing your life insurance needs, or making an extra contribution to your retirement fund or the kids’ college savings. A financial planner can help you decide what your top financial priorities should be.
- Prepare your estate: Receiving an inheritance is the perfect time to review your own estate plan, and to make arrangements for your heirs. Creating or updating your will and establishing a trust are two important steps to ensure that your estate will be distributed according to your wishes. Depending on your military status, your JAG office may provide assistance in estate planning. And some financial services providers offer step-by-step blueprints to help you map out your plan.
As you cope with your emotional loss and financial gain, ask plenty of questions and educate yourself about the options. Manage and use your inheritance in a way that would make your late loved ones proud.
True or False: Trusts are reserved for wealthy families.
False. A common misconception is that trusts are only used to pass along a family fortune. But a trust also can be a viable estate planning tool for families of average means. Trusts can serve many different purposes, including:
- Avoiding estate taxes taken from the financial assets of a person who dies, which leaves more money for the surviving family.
- Protecting the interests of children in complex family situations, such as after the parents divorce and remarry.
- Creating tax savings for anyone making a sizeable donation to charity.
A trust isn’t appropriate for everyone, but don’t rule it out. Talk to a financial planner to determine the best strategy for your circumstances.
Originally published on USAA.com