Loaded Questions: What should I do with my inheritance?

I was asked a couple weeks ago by a lovely couple, what they should do with their inheritance. The final parent had just passed away earlier this year and left a good amount to all the adult children to split. Inheritance is an exciting event to contemplate, but of course it comes at a very big expense. If you are a person who has this same question, I first want to offer my condolences to you and your family. You cannot have an inheritance without going through a major life event in your family.

Hi, I’m Christina Gamache, founder of Audax Wealth Management. I’m not your typical financial advisor. I don’t earn a commission on any products that I recommend because I don’t believe in having a conflict of interest. I work with business owners, women and families who need good, solid financial advice. I help them organize their financial priorities so they can take care of the things that matter the most to them.  As a financial planner and a fiduciary, I have three thoughts that you may want to consider if you are one of these people asking this loaded question.

I’m going to assume that if you are watching this video or reading the blog that you are a person who wants to make an informed decision about your inheritance rather than spend it unwisely. So, good for you!

First and foremost, check out the tax consequences. The taxes you’ll need to pay on the inheritance will depend on the type of asset that you are receiving and when you will sell that asset. You’ll either be taxed at your ordinary income rate or a capital gains rate. Can you ask for the taxes to be withheld, or do you need to set aside money to pay the taxes? Will the inheritance put you above certain thresholds, whether it be for FAFSA filing for your children’s education, Medicare, FSA accounts, Net Investment Income tax, or even certain tax deductions? Pay very close attention to the tax consequences. Get your CPA and financial advisor involved as soon as possible.

Second, review your cash needs and your debt situation. I always say that a budget is the way to success. Review your budget and see how this inheritance affects your daily life. Do you have credit card debt that could be paid off? Do you have a mortgage or student loans? Could the inheritance help you in your daily life? Could you put more of your inheritance into different savings vehicles, either taxable or nontaxable? Yes, depending on the amount you are receiving, you’ll likely want to buy something tangible for yourself – whether it’s a new car, a fancy vacation or something else. That’s fine, too, just make sure you build it into your financial plan.

Last, how will your newfound inheritance affect you in the long run? Does your estate plan need to be updated? Will this change how you need long-term care in the future? Do you need less insurance now? Do you need more insurance now? Will you be gifting part of this inheritance to your children or a charity?

Let me leave you with a story. In my experience, I have seen many adults receive inheritances. I’ve seen how an inheritance can be squandered or cherished. I remember one story of a lady who received over $3 million. We put the money to work in savings accounts, retirement accounts and the like. She was set up for life and would never need to work again because she was single and didn’t have children. Unfortunately she blew through all of her inheritance in less than five years and is now working minimum wage past the age of 65. I tell you this story for a few reasons. I hope that if you are a recipient of an inheritance either now or later in life, that you educate yourself and be a good steward of the resources given to you. I also hope that if you are the person giving someone an inheritance down the road, that you will talk openly and candidly about your expectations for the inheritance and for the person receiving the inheritance now, before it’s too late.

Ok, so three thoughts about what to do with an inheritance. First, get educated on those taxes! You don’t want any surprises, and you want to make sure you are as tax efficient as possible. Second, review your budget! How can the extra income help you pay off debt or help you in your daily life? Third, how does your inheritance affect your long-term financial plan? How do you now need to account for your own end-of-life needs, your own gifting strategies or your own retirement?

I hope these thoughts were helpful to you. If you’d like to run through any scenario or if you have any questions, don’t hesitate to call or email me. I’m happy to talk through any of your financial plan as needed. Thank you for watching and see you next time.