HERE’S HOW TO RESPONSIBLY HANDLE IT
There are plenty of horror stories about sizable inheritances squandered on fast cars and glittering parties. But careful planning and good advice can help people use their good fortune in a way that creates lasting value. Consider these steps to make sure the money you receive after a loved one dies is used to best advantage.
BE DISCREET ABOUT IT
Be careful with how you share any inheritance news, says Johanna Fox Turner, a certified financial planner with Milestone Financial Planning in Mayfield, Ky. “People would just come out of the woodwork wanting you to invest in their good ideas.”
Turner advises talking to a trusted family member or friend who has no expectation of receiving a share of the money. She also favors fee-only financial planners who are paid a straight hourly rate for giving you advice instead of making commissions on the investments they sell you, which can lead to conflicts of interest.
TAKE YOUR TIME
“Take a deep breath,” Turner says. “Talk to advisers. Get some perspective.”
She has seen many people who are anxious about letting a significant sum of money sit in a savings account earning very little interest then rush to make investment decisions and make mistakes as a result. She says the potential gains from quick moves are outweighed by the risks of poor choices.
MAKE A FINANCIAL PLAN
Before you decide whether to use part of the money to pay off debt, to invest for your future or to donate to charity, it’s best to create a long-range financial plan. Then it can become easier to put the money to work.
“People think financial planners are for rich people,” Turner says. “They’re really more suited to middle-income people.”
She estimates that a compre- hensive financial road map takes around five hours for a qualified planner to help you develop, and the result is a clear set of priorities that enables you to allocate resources efficiently to achieve your goals.
CONSIDER CHARITY
When Jamie Schweser received $1 million at the age of 26 after his parents sold their business, he spent a lot of time talking to other young people who had been in similar situations. Schweser found them through Resource Generation, a non-profit organization that helps young people learn about charitable giving, and for which he later worked. His parents encouraged him to think carefully about how he used the money but didn’t discourage him from making his own decisions.
Ultimately, Schweser says he ended up giving away 75% — $750,000 — of his parents’ gift. He kept enough to buy a house and add to an emergency fund. Now 44, he owns a bookstore with his wife in Minneapolis and receives income from a couple of rental properties.
Even modest charitable contributions can be a win-win, both emotionally and from a tax standpoint. Turner says some of her clients feel guilty about taking tax deductions for charitable contributions, but she disagrees.
“Once you have the motivation to give, why not take advantage of what the law allows?” she says.
ENJOY IT
Depending on the size of an inheritance, it’s not a bad thing to have a little fun. Once you’ve made a financial plan and allocated the money accordingly, there’s something to be said for treating yourself.
For smaller inheritances, Turner recommends using 10% as fun money. If it’s a larger amount, she thinks $10,000 is a nice round number that could be spent on something enjoyable. But she emphasizes that a financial plan is crucial before this decision is made. Otherwise, it’s too easy to buy a nice car. And then another one three years later. And then another.
“If you envision yourself five years from now or 10 years from now and looking back,” Turner says, “do you want to have a lot of used cars?”
No matter how you use the money, you have to live with your decision. “Do something that will be a story that you like telling,” says Schweser, who still feels good about his decision to give the bulk of his windfall away. “Whatever you do, you’re going to end up telling that story to yourself over and over again, or to other people, so make a good story.”
Turner recommends thinking about the person who left you some of their wealth.
“This is their hard-earned money,” she says. “This is in their memory. You want to honor that memory and be a good steward.”
This article originally appeared on NerdWallet, a personal finance website.