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Inheritors do well to develop financial plan for windfall

On this blog, we try to focus on estate planning and probate issues, but there are also issues that can come for those on the receiving end of an estate plan. One of them concerns how inheritors should use a windfall. For those receiving an inheritance, it isn’t always as simple taking the money and enjoying it. The key is to handle the inheritance wisely, and make it contribute to one’s financial well-being. For this reason, those who receive and inheritance need to develop a strategy.

That strategy should involve an assessment of one’s financial situation, a degree of caution in terms of spending and investing, and obtaining good advice along the way.

Everyone will approach receiving an inheritance a little different, because everyone has a little bit different financial situation. It will depend on their age, debt level, whether they are supporting children or parents, and their retirement plans. There are many possibilities as to how a windfall can be put to use, but one smart one is to put priority in paying off high-interest debt. This includes credit cards.

Putting the money toward one’s mortgage may also be wise, depending on whether one hopes to enter retirement with a mortgage and one’s net worth outside the home. Money can also be put toward one’s retirement fund, a college fund, or an emergency fund.

One very important piece of advice is to not act rashly. To take one example, it may be nice to pay off one’s mortgage, but if it means having no money in retirement, it may not be the wisest investment. This, of course, will depend how close one is to retirement, the value of the home, and whether one is considering selling the home.

In terms of investing, it may be wise to take a cautious approach. Just because the money came easy doesn’t mean it should all be put in high risk investments. The risk level of one’s portfolio will depend on one’s age, assets, and other factors, but it shouldn’t necessarily be based on just having received a windfall.

Obviously, those who receive an inheritance do well to consult a financial planner, investment professional or tax accountant to help develop a plan. Not having a plan can lead to failing to make the best use of a valuable inheritance.

Source: Fox Business, “How to Make The Most of a Big Inheritance,” Judy Martel, May 9, 2012