Ask an Advisor: I just received a substantial six-figure inheritance. What should I do with the windfall?

Tags
Ask a Financial Advisor

To make Wealthtender free for readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a conflict of interest when we favor their promotion over others. Read our editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.
➡️ Find a Local Advisor | 🎯 Find a Specialist Advisor

Ask an Advisor: I just received a substantial six-figure inheritance. What should I do with the windfall?

A man with short brown hair and a blue button-up shirt smiles with arms crossed in an office setting. The background features a modern office with desks, chairs, and bright lighting. The scene is slightly blurred, focusing on the man in the foreground. — Image Credit: Wealthtender

Questions about whether to invest or spend a windfall and how to invest or where to spend it, all lead back to the same answer: if you have a solid financial plan, one that reflects your goals and priorities, it all falls into place because you follow your plan.

The financial plan specifies what to do with the financial resources you have. A windfall simply increases your resources and accelerates the timetable. Before you inherited the money, let’s imagine that your plan stated that you will use your income to pay down your mortgage every month, fund your children’s 529 Plans up to a certain amount, and set aside a set amount for retirement. After accomplishing those things, the plan says you will use your discretionary income – now increased because you have no mortgage and other financial goals have been met – to go on an African safari, your top “wish list” item.

In this scenario, your plan would guide you to first use the financial windfall to pay off your mortgage and fund the 529 Plans. Depending upon how much is left, you would then add to your retirement savings and start planning that trip to Africa.

There is no one-size-fits-all answer on the right way to spend or invest a windfall. The only answer is to have a financial plan and use it to put your inheritance to work meeting your goals. If you don’t have a financial plan, then your priority should be to temporarily park any cash in a safe place (such as a federally insured savings account) and hold off on any big decisions or changes while you work with an advisor to develop your plan. Having a plan will provide great peace of mind because you will know your goals, next steps, and how much of your inheritance could be used for a special splurge.

We have worked with many clients who came into a windfall through inheritance, stock options, selling a business, or other means. We see three common mistakes that you should be careful to avoid:

Lifestyle creep. A common byproduct of a financial windfall, this begins with the thought, “I have money now,” and leads to unsustainable new spending habits. This ends up making your long-term goals harder to achieve. Having a solid financial plan helps you to avoid this trap.

Clinging to inherited assets. The old saying, “what you own owns you,” is particularly relevant when you inherit assets because those assets become your responsibility. It takes time and effort to manage an investment portfolio, especially if you have real estate holdings. If you inherit your parent’s home and are reluctant to sell it, know that becoming a landlord can make you less free — probably not what your parents would have wanted.

Overlooking taxes. There are tax considerations that come with your inheritance. If you don’t plan with tax minimization in mind, , you can make very costly errors. For example, it may make sense to sell stock you inherit immediately to avoid capital gains taxes. If charitable giving is part of your financial plan, you’ll want to do that in a tax-aware way. Seek professional help to make sure you don’t accidentally share too much of your inheritance with Uncle Sam or your state.

Have a Question to Ask a Financial Advisor?

When you’re uncertain about money matters, submit your question to Wealthtender, and it may be answered by a financial advisor in an upcoming article or in the Wealthtender Expert Answers Forum.

Need personalized help? Visit wealthtender.com to find the right financial advisor for your unique needs.

This article was originally published on Wealthtender and is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions. Wealthtender earns money from financial professionals, which creates a conflict of interest when these professionals are featured in articles over others. Read the Wealthtender editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.