Receiving an Inheritance? Financial Advisors Say Do These Things First

It’s a bittersweet thing. For most people.

Inheriting a bequest means you have lost a loved one. From experience, even if you’re in your 50s, losing your parents hits you hard.

However, if your parents (or perhaps a rich aunt or uncle) leave you a large bequest, it can open up possibilities you didn’t expect or at least make them achievable far sooner than you expected.

On the flip side, if you’re not careful, the exhilarating feeling of abundance you experience could lead you to start spending more freely. That’s not necessarily a problem unless you quickly blow through the bequest, and the higher spending becomes an unsustainable habit.

If you recently received a large bequest or may someday receive one, getting professional advice before spending it down isn’t the worst idea.

With that in mind, I asked several financial advisors for their best tips for anyone in this situation.

Introducing the Pros

Here are the six financial advisors who contributed their best tips about what to do first when you receive an inheritance:

• David Dodd, CFP, CKA, Founder of The Other 90 Financial, LLC
• Angela Dorsey, Principal, Dorsey Wealth Management
• Daniel Masuda Lehrman, CFP, CSLP, Owner and Financial Planner, Masuda Lehrman Wealth
• Terry Parham Jr, MSFP, CFP, ChFC, CLU, RICP, WMCP, Wealth Advisor & Owner, Innovative Wealth Building
• Michael Rosenberg, RFC, CPFA, Founder and Managing Director of Diversified Investment Strategies, LLC
• Arielle Tucker, founder of Connected Financial Planning

Here’s what they had to say…

The #1 Tip Shared by Multiple Advisors – Pause and Reflect First

Nearly all the pros start by recommending you take your time and make (or update) your overall financial plan before using your inheritance.

David Dodd says, “If you don’t already have a financial plan (i.e., a plan for how money serves you and your life), the first step is to create one to get clear about what the money is for. Not just this money, but any money… What purpose does it serve and how can it be best deployed? Do this as if wiping the slate clean. Pretend you don’t have the money and craft a life plan. Let your values inform your goals, and your goals inform your plan. Then and only then can you make wise decisions about how to use the funds, what to invest in, etc. Using the money without making a plan first will likely bring lackluster results and lead to regret. Once you have a plan with the proper foundation of values and goals, you can make tactical decisions with wisdom.”

Daniel Masuda Lehrman agrees, “Be careful of lifestyle inflation, the tendency for spending to go up after a big promotion or in this case, a significant inheritance. It’s important to avoid big impulsive decisions during this time. Before you spend a dollar of your inheritance, consider how this windfall affects the priority of your short-term and long-term financial goals. Specifically, review your estate plan, tax implications, and emergency fund. Talk to a financial advisor, as the stakes are higher when you make mistakes with sizable wealth.”

Arielle Tucker recommends, “Consider allocating just a small portion for immediate needs or desires but prioritize strategic planning over impulsive spending to maximize the long-term benefits of the inheritance. Take a moment to review your goals and current financial situation and ensure alignment with your long-term objectives. While it’s tempting to splurge after receiving an inheritance, it’s important to pause first. I recommend creating a financial plan or revising one that’s already in place.”

Angela Dorsey echoes that idea, “Your first instinct may be to rush out and buy that nice car you’ve had your eye on for years, but before you make any large purchases, slow down and think about the good you can do with the money.”

Terry Parham Jr. also shares this sentiment “When receiving a substantial inheritance, exercising restraint is often the most prudent approach. Many individuals succumb to the temptation of immediately spending on high-value items such as new cars or homes. Hastily making such decisions without a thorough analysis of their long-term impacts can be dangerous to your financial well-being. 

“Allowing yourself a ‘cooling-off’ period before major spending can be a wise strategy to avoid significant financial errors. For instance, postponing any major expenditures that cater to desires rather than needs for at least 30 days can provide valuable perspective. It’s really hard to put the ‘financial toothpaste’ back into the tube, so taking a pause can save you from making hasty decisions that could cost you big time. 

“As for immediate expenditures, the question isn’t just how much is acceptable to spend right away, but rather, is there a necessity to spend at all? If there are no urgent needs, it’s advisable to avoid any significant outlays. Before making any financial moves, it is essential to update your financial plan. This involves a comprehensive review of your assets and liabilities and a reassessment of your goals and risk tolerance. Evaluate what has changed and what remains the same to determine if your existing financial strategy is still appropriate. Additionally, consider revisiting crucial aspects of your financial life, such as life insurance, designated beneficiaries, and estate planning, as these will likely become priorities.”

As the saying goes, “Decide in haste, repent at leisure.”

Next, Prepare for Problems

It’s a widely quoted statistic that far too many Americans live paycheck to paycheck and wouldn’t be able to cover a $1000 expense without borrowing.

In reality, an unexpected $1000 expense is just life happening. It’s not a real emergency. For that, think of far more tragic possibilities, such as an accident or serious illness leading to 6- or 7-figure medical bills. Those are the kinds of things that often lead to bankruptcy.

Receiving a major bequest can help you avert such a risk.

As Dodd says, “In most instances, you’ll want to set aside some cash to maintain an emergency fund equal to 3-6 months’ worth of expenses.”

Next Up, Pay Down Debt

Dorsey says, “The next thing to consider is paying off high-interest debts such as credit card debt and car loans. That’s a great first option to use an inheritance.”

Tucker agrees, “An inheritance, small or large, can help you pay down debt or prepare for a larger purchase like a home.”

Dodd expands, “High-interest debt is going to be an obvious target. Paying down high interest is akin to getting a high return on that money (since you’ll avoid the high interest on that balance), but without owing taxes on the return.”

Parham cautions, however, “It’s common to see debts like mortgages, student loans, and car loans paid off swiftly. While these actions aren’t inherently negative, once you have an updated financial plan, you may realize it isn’t the best use of your new funds to pay off all debt.”

Especially if your mortgage is a 30-year-fixed loan with an interest rate lower than what you can get by investing the money, prepaying your mortgage may indeed not be the most financially savvy thing to do with a large sum of money.

However, in many cases, paying off a mortgage as soon as you can brings enough peace of mind that the emotional consideration trumps the financial one, a point made by Dadd, “A less obvious choice may be to pay off lower-interest debt, such as auto loans or your home mortgage. The financial, psychological, and spiritual freedom of paying off debt can have significant value. The flexibility and psychological value of paying off debt (at any interest rate) can lead to greater happiness and the ability to enjoy life with reduced stress from such obligations.”

Find a Safe Temporary Home for Your Funds

Depending on the size of the bequest, it may be somewhat challenging, but not impossible to store it safely. 

The Federal Deposit Insurance Corporation (FDIC) covers up to $250k per financial institution, per account type, and per ownership. While FDIC may only cover $250k placed in your individual savings account, you can have another $250k covered in a money market account, another in a joint savings account, and more in another bank.

Dorsey says, “A federally insured bank or credit union account can be a good, safe place to park the money while you make your decisions. Your money won’t earn much interest, but, as long as you stay under the FDIC limits of $250k per account type, per ownership, per bank, it will be safe until you decide what to do with it.”

Parham goes a step further, “For non-essential expenditures, consider transferring your funds to a less accessible account, such as a high-yield savings account, which can serve as safe temporary storage while you consult with a financial professional to make informed decisions.”

Rosenberg sounds a cautionary note, especially if you’re concerned that you and your spouse may not stay together forever. He says, “When receiving an inheritance, it’s important to know that if the beneficiary is married, those funds aren’t yet a marital asset. As long as you don’t commingle the funds with joint money, in the event of a future divorce, the bequest money would remain yours without being subject to equitable distribution. However, once you place those funds in a joint account or use them for a down payment on a home, they become a marital asset subject to equitable distribution.”

With a Plan in Place, Consider Investing for the Future

Your financial plan will almost certainly include saving and investing for your future needs and desires.

Dorsey says, “Hopefully, upon receiving an inheritance, you’re thinking of savings, Roth IRAs, and other investment strategies. You can also invest in other ways, like purchasing a new home or rental property.”

Keep in mind, though, that especially if your inheritance is very large, people may advise you to invest in all sorts of schemes and esoteric assets.

That’s usually a great way to lose it all.

Dodd adds, “I’d recommend not doing anything major and unusual. Do ordinary things and invest in ordinary ways. Don’t let the allure of prestigious opportunities and the sales pitches of others lead you to put more money in their pocket, possibly at the expense of yours. These don’t have to be mutually exclusive but often can be. Invest simply and don’t overcomplicate things.”

Thinking of Others

Inheriting a large sum of money can be exhilarating. One of the best things you can do with the money is share it with family and/or pay it forward by donating to a charitable cause about which you care deeply.

Dorsey says, “If you have children, start thinking about the future. You may want to put money into their college fund (or those of their children, if any). If they already borrowed to pay for their degrees, you can help with their student loan payments. Helping with down payments on homes can also bring a lasting benefit.”

When I was in my 30s, my dad inherited a chunk of money from his older sister, who had died without any other family. It wasn’t a life-changing amount of money, and my parents didn’t need it so they decided to split the money between my siblings and me, with smaller amounts gifted to our kids. 

The amount I received wasn’t enough for a down payment on a home, and I didn’t have a pressing need to spend it, so I invested it. That kicked off my investing journey since before then I didn’t have much in the way of excess earnings that I could regularly set aside money for the future. If I had to guess, that money must have grown into the low six figures over the past couple of decades.

Dorsey continues about gifting beyond your family, “Especially if your immediate family does not have immediate needs, a great goal could be to pay forward the legacy you received. However, since gifts such as charitable donations have tax implications, discuss this with a financial planner or tax expert. Also, keep in mind that while you generally won’t owe tax on inherited money, inheriting other types of assets, such as securities, retirement accounts, or real estate, may have tax implications.”

The Bottom Line

Stephen Covey, in his timeless “The 7 Habits of Highly Effective People” suggests (in Habit 2) “Begin with the end in mind.”

Considering that, Dodd’s advice rings especially true, “Get clear about your values and goals and then make and execute a simple (though not necessarily easy) plan to fund a life you love and achieve your goals.”

If you don’t use your inherited money before figuring out what is most important to you, those most important things will benefit more.

Tucker puts things in perspective when she says, “Receiving a bequest is a valuable opportunity to secure your financial future and consider future generations to come. Approach your inheritance with gratitude and responsibility, honoring the legacy of your benefactor by making thoughtful and informed decisions that are aligned with your values.”

Have a Question to Ask a Financial Advisor?

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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.

Disclaimer: This article 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.