What to Do When You Inherit Money

Ever wonder (or dream) what you would do if you inherited a windfall of money? For most of us a large inheritance is only a dream but a "lucky" few will receive an amount so substantial that it can change their lives. So, what should people do when they inherit money? Here's what Money Central advises:

Your first move should be to deposit your new wealth in a bank or brokerage account -- possibly one that isn't held jointly with your spouse, advises Martin Shenkman, a tax and estate lawyer in Teaneck, N.J.

In other words, put it somewhere safe so you can take a deep breath and think about what you want to do. You have all the time in the world to spend it. Relax a bit, get through the loss in your life (the passing of a loved one) and then decide how to move on and spend your windfall.

Sounds like good advice to me. Oftentimes when people get into a rush and make spur-of-the-moment decisions, they end up doing something they regret. Wise counsel says to wait a bit before making any financial moves.

For me, I'd certainly take some time to think about what to do. And the decision would depend on how much money was inherited. If was enough that I could potentially quit my job, that would be one whole set of decisions I'd have to go through. If it wasn't enough, I'd likely just invest it in an index fund and keep going about my business as usual.

Comments

[Miguel]

I tend to think about this question, not because I expect to ever inherit anything, but because if my wife and I both met an untimely demise (such as a plane crash), a number of our heirs could inherit very significant sums (though half the $$$ will go to charity).

While it sounds good in theory to leave people significant sums of money, the problem is that some of those people might not be able to handle it for several reasons.

They could be too young (in which case trusts and trustees are needed), plus you don't want to de-motivate young people by making things too easy too early in life. Or some people could be irresponsible with money (which suggests they'll blow whatever you leave them), or they could have an addiction problem (which the money could actually make far worse), or they could be elderly (and vulnerable to con artists). And what about someone who's marriage is on the ropes - getting a windfall could create an ugly divorce situation. The list goes on.

How to leave money in a way that makes people better-off, not worse off is a lot more challenging than you'd think. In fact, in the next version of our estate plan, my wife and I are probably cutting everybody way back to more modest sums (also because our assets have grown to where people would be getting more than we expected under the existing plan).

Money, especially a windfall can be a very destructive thing. I'll bet overall, windfalls have caused more pain than pleasure to the recipients.

[My New Choice]

Back in March I wrote a post about how to handle a financial windfall (link provided below if interested) and commented that one needs to take a step back and take a deep breath before making any decisions. During that process, one should deposit the funds somewhere safe while they evaluate everything.

It is important to realize that you might not have the answers and can consult with a professional for advice, whether it be with the tax implications or investment options. Just be careful with any selection of a professional.

[Anitra]

My husband and I are seeing a potential windfall of a few thousand dollars in the near future. We've talked about it and will probably beef up our emergency fund/savings, put some in an IRA, and use whatever is left to pay down our mortgage.

I doubt we would ever change our lifestyle based on a windfall (even a much larger one) - we'd pay down our loans (house and student) and invest for the future. Just think what kind of retirement that money could bring after compounding for 40 years!

[Matt]

My wife and I ran into a sort of interesting situation along these lines. Two weeks before our wedding and a week after we graduated college, her grandfather died and we received a large wedding present/inheritance/leftovers from her college fund that increased our assets by about a factor of 20 and most of it was in a single stock. Figuring out what to do with that money, the tax issues associated with it and everything else would have been very stressful if I hadn't had help from a financial advisor who'd been managing my Roth for a few years. I feel like I know enough NOW that I could have distributed that money well but at the time I'd have handled it poorly. Looking back, I can't complain at all about how my financial advisor distributed it. So my advice is definitely to finds someone you can trust who can give you advice at a time like this.

I also would suggest finding someone you can trust when you have little money. Its much harder to find someone good when there's more at stake.

[UKMoneyPot]

In the UK, the first thing a lot of people do after they receive an inheritance is pay tax on it! (Current threshold is £300,000 but the average house value is over £200,000 so if parents have a slightly above average property and a few savings, the children will be liable to pay 40% tax on any amount over the threshold.

[MoneyChangesThings]

I was lucky enough to inherit money, though not enough to change my life. One of the exciting things it enabled me to do was to immediately put 10% of it in a Fidelity Charitable Trust, so that I could get the tax benefits in a year it was financially helpful, but do not need to disburse the contributions until I am ready to make those decisions.
I've written more generally about our tithing budget:moneychangesthings.blogspot.com/2007/04/schedule-t-tithing.html

[davydave28]

I am a recent college graduate. I have aspirations to go to PA school. I have the grades, I just need some medical experience. My mother passed away two years ago and left my sibling and I each roughly 60 thousand dollars. I have no college debt and am going to be moving to Syracuse, NY soon. I have never had a lot of money and I don't know how to save it. My sister thinks I should buy property in Syracuse, instead of renting. However, I don't know anything about owning a home. I don't intend to do anything wild with the money. I simply want to stretch it as far as I can in the future. Can anyone with any financial experience give me some advice?

[FMF]

Davy --

Check back on the main page in a couple weeks. I'll post your question for readers to answer.