Take a sensible approach to that inheritance

by | Jul 27, 2021 | Estate Planning |

There is occasionally a sensational headline about unsuspecting heirs getting millions from someone who lived frugally. However, only .3% of all heirs get life-changing inheritances, with $300,000 being the average. One-quarter of the average is, nevertheless, still a substantial sum of money, and it can lead to complications that the heirs or their benefactors did not anticipate.

It’s not just a lump sum of cash

Estates are seldom a bank account that can be closed. Instead, it is usually a portfolio of investments that includes real estate, stocks, mutual funds, retirement accounts, and other possessions of value.

Florida famously does not have estate taxes, and the federal government threshold is over $11 million and counting for couples, but this does not mean that heirs will not pay taxes. For example, those who cash out inherited tax-deferred retirement accounts will need to pay taxes if they close them rather than roll them into an inherited IRA. There may be a house or other property to sell or maintain as well. This must all be handled by someone, and it takes time.

Many will spend it

Even $75,000 is a serious windfall for many of us. Some financial experts say it is okay to buy a luxury item or go on a memorable trip, but this modest sum does not signal a lifestyle change.

Unfortunately, most are not cautious with an unexpected windfall – an estimated 70% of heirs spend their money within a few years even if they are militant about growing their kids’ college fun.

Pay off burdensome debt

Heirs should avoid the temptation to use the money as a down-payment for an expensive home or car that previously would have been out of their price range (unless the lump sum gets them a monthly payment that they can comfortably pay). The heir can better serve their financial interests by paying off high-interest debt and student loans, which can free up cash previously spent servicing those debts.

Plan for the future

The wisest course of action may be to put it in a retirement savings account or a money market and try to forget about it, at least until consulting with a financial expert, a tax professional and an attorney. These professionals can help heirs develop a sensible plan for a brighter financial future with a more comfortable or earlier retirement. At that time, it may also make sense for heirs to come up with an estate plan of their own or update one already in place. This can enable them to pay it forward for the next generation.