If you are lucky enough to receive an inheritance, you might be wondering what you should do with it. It can change your life, or it can be detrimental to your financial situation. We are assuming you want your inheritance to last for many years to come. You likely even want to make a profit. This is possible if you know how to play your cards right.
Did you know that 34.9% of inheritors see a decline or no change in their financial situation? In this guide, we will help you keep, invest, and profit from your inheritance by making smart decisions that could change your financial outlook for years. Follow our guidelines to ensure your bright financial future after you inherit 500K.
Steps to Take After You Receive Your Inheritance
Slow Down and Think
If you inherit a great sum of money, you might be tempted to run out and buy a sports car. In reality, you should slow down and take a look at all your options. You should take the time to grieve over the loss of your loved one. The money is not going anywhere anytime soon. It is important to get over the shock and grieve your loved one before moving on to making major financial decisions.
You should think about what you have to pay off and where you want your financial future to be in 10 or 20 years. It is important to hire the right people to advise you with your new-found wealth. Most adults who receive an inheritance only save about half of it.
Hire a Financial Advisor
The first step after you take some time to breathe is to hire a financial advisor to help you make the best decisions regarding your new inheritance. If you inherit a lot of money, then your family member might have had a financial advisor before they passed. It could be wise to stick with the same advisor since they will already be familiar with your situation. They also might be able to shine some light on what your loved one wanted you to do with the inheritance.
It might be wise to hire a new financial advisor who will have your best interests at heart. A different financial advisor will only serve your interests instead of the family’s, so this could be a good decision going forward. It will depend on the previous relationship you had with your family’s financial advisor.
You might also want to hire a debt consultant or tax attorney to see if they can assist you with paying down debt and the tax implications of inherited money. If you inherited a house or plan to invest in real estate in Georgia, then you should hire a real estate agent to help you handle your affairs.
Pay Off Debt
The very first inheritance dollar you spend should go toward your debt. If you have student loans, credit cards, or other loans, you should focus on eliminating those debts before you invest. You should think of your debts as negative returns since you are likely paying 15% interest per year. An investment that has a return rate of 15% is a good thing, but an interest rate of 15% is a bad thing. By paying down your debts, you will free up future cash flow and not have to pay exorbitant interest fees over the years.
Most financial consultants agree that if you can easily eliminate your debts by simply paying them off early, then you should absolutely take advantage of that opportunity. Another thing you can do is pay down some of your mortgage on your primary residence, which will save you interest in the long run.
It is recommended you have at least three to six months of living expenses in an emergency fund in case something happens. You should consider your current financial situation when determining how much money to put away in an emergency fund. Certain factors such as family size, living expenses, and job stability will play a role in how much of your inheritance you use for an emergency fund.
You should make a list of your monthly expenses to determine how much money you should save. For many people, three months’ worth of expenses might be a comfortable amount to save.
For some families, a college fund for their children might be just out of reach. If you get an inheritance, you might finally have a chance to save up for your children’s college funds. Saving for your kids’ college funds is a smart way to use some of the inheritance money.
There are plenty of ways you can invest in your children’s college funds, but if you have fallen behind, then we recommend using some of the inherited money to start an Education Savings Account (ESA), a 529 Plan, or a Uniform Transfer/Gift to Minors Act to catch up. This is a great way to invest in your children’s future and help them reach their goals.
If you are not squared away for retirement, then now is your chance. Most people want to maintain their current standard of living when they retire. You should be prepared, especially since you don’t want to spend your life only working. We recommend keeping your job even if you have inherited a very large sum of money. If you want to retire early, then make sure you have all of your other financial items checked off your checklist.
We recommend using your inheritance to invest some additional money into an Individual Retirement Account (IRA). An IRA can be a fantastic way to supplement your workplace retirement account if you have one. An IRA can help you save additional money for retirement, reduce your tax bill, and offer you numerous different investment options.
Now that you have taken care of the preliminary steps with your inheritance, you can start trying to make a profit. We recommend investing if you want to make your 500K last a lifetime.
One of the best investments you can make is in the real estate market. Real estate remains a solid investment for long-term and short-term cash flow returns. If you have the funds to spare, you can buy a rental property, which will give you a cash flow income and allow you some freedom. The rental income from the property will go straight back into your pocket if you buy a home with cash. This is the best way to ensure a financial future since you can make money from the property and resell it once it appreciates.
Real estate also offers significant tax breaks for the homeowner. If you buy a rental property, you can enjoy the cash flow from the rental income without having to put in too much extra work. Keep in mind, that you will have to maintain the property for your tenants. You can either hire someone to do this or manage the property yourself.
You can also invest in commercial real estate buildings such as warehouses, office buildings, or retail spaces. These are basically the same as rental properties, except they require less management for the most part. There is a much lower risk of tenant turnover, and you won’t have to worry about someone being there all day and night.
Mutual funds are used as an investment vehicle that consists of stocks, bonds, and securities. They are a great way for you to use some of your inheritance to increase your holdings and make a profit. They are managed by a professional money manager and are generally considered relatively safe. There are four different types of mutual funds: aggressive growth, growth, growth and income, and international. If you let those mutual funds appreciate for some time, you can expect to see returns around 8 to 10% per year after a few years. You can also invest in stocks, private equity, or an IRA account.
Live a Little
Let’s be honest, the first thing you wanted to do when you received your inheritance was plan a vacation, buy a boat, or buy a house on the beach. We are not saying that those things are bad. In fact, we are saying the opposite. You should enjoy your life a little. We recommend using some of your inheritance to cross something off your bucket list, but don’t go overboard. Once your current and future financial situations are secure, you can spend some of your money on upgrades or other wants.
We recommend saving this as the last thing you do since you might not be sure of how much money you will have leftover once you pay off debts and secure your financial future.
Leave Something Behind
It is important to remember where your inheritance came from as your work your way through trying to decide what to use it for. The loved one who worked so hard to provide you with an inheritance after they passed should not be forgotten. You might want to leave something of their legacy behind. You can donate to a cause that they cared about. You could donate to your favorite charity in honor of your loved one. It is important to give back to the community with your inheritance since many people will never receive one.
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Important Questions Regarding Your Inheritance
Is there a will?
Ideally, when a loved one passes away, there will be a will in place to execute. A will ensures that each child or grandchild will receive their part of the estate. During the estate planning process, a will should have been drawn up to divide the assets between the survivors as the loved one saw fit. A will designates the beneficiaries.
If someone wants to divide everything evenly, then all of the beneficiaries can be listed in the will. If someone wants certain assets to go to certain people, then it should be written out in the will. For the process to begin, a will must go through probate and be assigned an executor. A probate court will authorize the transfer of assets to beneficiaries.
What happens if there is not a will?
When there is not a will in place before someone dies, things can get a lot more complicated. If a loved one dies and there is no surviving spouse, then the inheritance will go to the survivors. The probate court is in charge of deciding what the deceased would have wanted as best as they can. They usually look at the accounts, property, and business holdings to determine if the deceased authorized any of the survivors on those accounts.
A probate court can take many months or even years to settle a person’s estate if there is no will in place when they die.
What are inheritance taxes, and do I have to pay them?
There is not an inheritance tax at the federal level. Inheritance taxes are required by some states on the assets that a person leaves behind, however. They will need to be paid by the beneficiary. The states that require an inheritance tax are Maryland, Kentucky, Iowa, New Jersey, Nebraska, and Pennsylvania.
What are estate taxes?
Estate taxes are taxes that are paid on a person’s assets after their death. In 2020, the federal estate tax was only required on assets over $11.7 million. Currently, 13 states have an estate tax with exclusion rates that vary based on the amount of money in the overall estate.
Does the inheritance have restrictions?
Many people will write restrictions into their will, which must be executed by a probate court. The restrictions might affect how an inheritance is paid out. Some wills might include clauses such as the inheritance must be paid in small installments instead of large sums. There might be other restrictions, such as requiring that the inheritance be used only for educational purposes. Make sure you read the fine print before deciding what to do with your inheritance.
When a loved one dies, we understand how hard it is to handle all of the different aspects surrounding their death. It is also important that you take time to grieve and prepare yourself for what is to come. If you were lucky enough to receive an inheritance from a loved one, then we recommend you use it as wisely as possible.
One of the best ways to put your inheritance to work for you is to invest in real estate. It can create cash flow while you invest in your financial future. If you are ready to invest your inheritance wisely or simply take a look at what is on the market, feel free to reach out to us for a consultation.