You just learned of the passing of a loved one. During this stressful and emotionally taxing time, you also find out that you’re receiving an inheritance. While you’re grateful for the unexpected windfall, knowing what to do with an inheritance can bring its own share of stress.
While the amounts vary greatly, the Federal Reserve Board’s Survey of Consumer Finances reports that an average of roughly 1.7 million households receive an inheritance each year. First words of wisdomâresist the urge to spend it all at once. According to a study funded by the Bureau of Labor Statistics, one-third of people who receive an inheritance spend all of itâand even dip into other savingsâin the first two years.
Not me, you say? Still, you might be asking, “What should I do with my inheritance money?” Follow these four steps to help you make smart decisions with your newfound wealth:
1. Take time to grieve your loss
Deciding what to do with an inheritance can bring with it mixed emotions: a sense of reprieve for this unexpected financial gain and sadness for the loss of a loved one, says Robert Pagliarini, certified financial planner and president of Pacifica Wealth Advisors.
During this time, you might feel confused, upset and overwhelmed. âA large inheritance that pushes you out of your financial comfort zone can create anxiety about how to best manage the money,” Pagliarini says. As an inheritor, Pagliarini adds that you may feel the need to be extra careful with the funds; even though you know it is your money, it could feel borrowed.
The last thing you want to do when deciding what to do with an inheritance is make financial decisions under an emotional haze. Avoid making any drastic moves right away, such as quitting your job or selling your home. Some experts suggest giving yourself a six-month buffer before using any of your inheritance, using the time instead to develop a financial plan. While you are thinking about things to do with an inheritance, you can park any funds in a high-yield savings account or certificate of deposit.
âA large inheritance that pushes you out of your financial comfort zone can create anxiety about how to best manage the money.â
2. Know what you’re inheriting
Before you determine the things to do with an inheritance, you need to know what you’re getting. Certified financial planner and wealth manager Alex Caswell says how you use your inheritance will largely depend on its source. Typically, Caswell says an inheritance will come in the form of assets from one of three places:
Real estate, such as a house or property. As Caswell explains, if you receive assets from real estate, you will transfer them into your name. As the inheritor, you can choose what to do with the assetsâtypically sell, rent or live in them.
A trust account, a legal arrangement through which funds are held by a third party (the trustee) for the benefit of another party (the beneficiary), which may be an individual or a group. The creator of the trust is known as a grantor. âIf someone inherits assets through a trust, the trust documents will stipulate how these assets will be distributed and who ultimately decides how they are to be invested,” Caswell says. In some cases, the assets get distributed outright to you; in other instances, the trust stays intact and you get paid in installments.
A retirement account, such as an IRA, Roth IRA or 401(k). These accounts can be distributed in one lump sum, however, there may be requirements related to the amount of a distribution and the cadence of distributions.
When considering things to do with an inheritance, know that inherited assets can be designated as Transfer on Death (TOD) or beneficiary deeds (in the case of real estate), which means the assets can be transferred to beneficiaries without the often lengthy probate process. An individual may also bequeath cash or valuables, like jewelry or family heirlooms, as well as life insurance or stock certificates.
Caswell says if your inheritance comes in the form of investment assets, such as stocks or mutual funds, you’ll want to think of them as part of your own financial picture. âAll too often, we see individuals end up treating inherited assets as a living extension of their passed relative,” Caswell says. Consider how the investments can be used to support your financial goals when thinking about things to do when you get an inheritance.
An average of roughly 1.7 million households receive an inheritance each year.
3. Plan what to do with your financial gain
Just like doing your household budgeting, it’s important to “assign” your inheritance to specific purposes or goals, says Pacifica Wealth Advisors’ Pagliarini. Depending on your financial situation, the simple concepts of save, spend and give may be a good place to start when deciding on things to do when you get an inheritance:
SAVE:
Bolster your emergency fund: You should have at least three to six months of living expenses saved up to avoid unexpected financial shocks, such as job loss, car repairs or medical expenses. If you don’t and you’re deciding what things to do with an inheritance, consider parking some cash in this bucket.
Save for big goals: Now could be a good time to boost your long-term savings goals and pay it forward. Things to do when you get an inheritance could include putting money toward a child’s college fund or getting your retirement savings on track.
SPEND:
Tackle debt: If you’re evaluating what to do with an inheritance, high-interest debt is something you could consider paying off. Spending on debt repayment can help you save on hefty interest charges.
Reduce or pay off your mortgage: Getting closer to paying off your homeâor paying it off entirelyâcan also save you in interest and significantly lower your monthly expenses. Allocating cash here is a win-win.
Enjoy a little bit of it: It’s okay to use a portion of your inheritance on something you enjoy or find rewarding. Planning a vacation, investing in more education or paying for a big purchase could be good moves.
GIVE:
Donate funds to charity: Thinking about your loved one’s causes or your own can continue legacy goals and provide tax benefits.
When deciding what to do with an inheritance, taxes will need to be considered. “It is extremely important to be aware of all tax ramifications of any decision around inherited assets,” Caswell says. You could be required to pay a capital gains tax if you sell the gift (like property) that was passed down to you, for example. Also, depending on where you live, your inherited money could be taxed. In addition to federal estate taxes, several U.S. states impose an inheritance tax and/or an estate tax.
Since every situation is unique and tax laws can change, when considering things to do with an inheritance, consult a financial advisor or tax professional for guidance.
Make your windfall count
Receiving an inheritance has the potential to change your financial picture for good. When thinking about the things to do when you get an inheritance, be sure to give yourself ample time to grieve and to understand all of your options. Don’t be afraid to lean on the experts to get up to speed on any tax and legal implications you need to consider.
Planning can go a long way toward making the right decisions concerning your newfound wealth. Being responsible with your inheritance not only helps ensure your financial future, but will also honor your loved one’s legacy.
The post 4 Smart Things to Do When You Get an Inheritance appeared first on Discover Bank – Banking Topics Blog.
My wife and I are looking to retire in three years from New Jersey to Florida or a Florida-type atmosphere â warm weather, no snow!
We will be getting around $5,000 from Social Security monthly and will have a little over $1 million spread among savings/401(k)/house equity. We want to buy a condo for about $250,000 that has all the extras like pools, restaurants, social activities and near the beach.
Can you make any suggestions?
Thanks,
Marty
Dear Marty,
With 1,350 miles of coastline in Florida alone, never mind the rest of the South, you have many possibilities for your retirement. But as you can imagine, properties closest to the beach are more expensive, so ânear the beachâ may involve some compromise.
I started my search with Realtor.com (which, like MarketWatch, is owned by News Corp.) and its picks of affordable beach communities, but didnât stick to it exclusively.
My three suggestions are just a starting point. No place is perfect, not every development will have all the amenities you want, and every town has its own personality, so you may want to think about what else is important to you. You also may want to consider gated communities and townhomes, not just multistory condominium buildings.
As you narrow down your list, I recommend you visit at least twice â once in the winter to experience the crowds in high season and once in the summer to understand what southern humidity is like. Itâs worse than in New Jersey.
Think about how you will build your new social network, even with all the social amenities in your condo building. Donât rule out the local senior center or the townâs recreation department.
Consider renting for the first year to test it out to make sure youâve picked the right area.
Then there are the money questions. The last thing you need is a surprise.
Youâll have condo fees; they can be quite high, particularly in a high-rise building along the beach. What do they cover and what donât they cover? How much have fees been rising over, say, the past 10 years? How does the board budget for bigger repairs? More broadly, are you OK with the condo associationâs rules?
Ask about the cost of both flood and wind insurance given that the southern coastline is regularly threatened with hurricanes. Thatâs on top of homeownerâs insurance. Or are you far enough inland that you can get away without them?
Walk into the tax assessorâs office to try for a more accurate tax assessment than your real-estate agent may give you. And since this would be your primary residence, ask about the homestead exemption.
And donât forget that youâre trading your New Jersey heating bill for more months of air conditioning; what will that cost?
Finally, three years isnât that far away. Start decluttering now. Thatâs hard work, too.
Here are three coastal towns to get you started on your search:
Venice, Florida
Venice Beach pier
frankpeters/iStock
This town of nearly 25,000 on the Gulf Coast is part of the Sarasota metro area, deemed by U.S. News & World Report to be the best area in the U.S. to retire. Venice is 25 miles south of Sarasota and its big-city amenities; itâs 60 miles north of Fort Myers, the runner-up in the U.S. News listing.
It also made Realtor.comâs list of affordable beach towns for 2020.
This is a retiree haven â 62% of residents are 65 and over, according to Census Bureau data.
While you can always travel to the nearby big cities, when you want to stay local, see whatâs on at the Venice Performing Arts Center and the Venice Theatre. Walk or bicycle along the 10.7-mile Legacy Trail toward Sarasota and the connecting 8.6-mile Venetian Waterway Park Trail to the south. The latter will lead you to highly ratedCaspersen Beach.
Temperature-wise, youâll have an average high of 72 in January (with overnight lows averaging 51) and an average high of 92 in August (with an overnight low of 74).
Hereâs what is on the market right now, using Realtor.com listings.
Boynton Beach, Florida
Boynton Beach condos
Carl VMAStudios/Courtesy The Palm Beaches
On the opposite side of the state, smack between Palm Beach and Boca Raton, is this city of about 80,000 people, plenty of whom are from the tri-state area. More than one in five are 65 or older.
Weather is similar to that in Venice: an average high of 73 in January and 85 in August.
Boynton Beach is in the middle of developing the 16-acre Town Square project that will include a cultural center and residential options, among other things. Still, this is an area where one town bleeds into the next, so whatever you donât find in Boynton Beach, youâll probably find next door.
At the western edge of town is the Arthur R. Marshall Loxahatchee National Wildlife Refuge, 145,000 acres of northern Everglades and cypress swamp. The Green Cay Nature Center is another natural attraction.
You can also hop Tri-Rail, a commuter train line that runs from West Palm Beach to the Miami airport with a stop in Boynton Beach, when you want to go elsewhere. The fancier Brightline train is adding a stop in Boca Raton to its existing trio of West Palm Beach, Fort Lauderdale and Miami; the current plan is for a mid-2022 opening.
This city has many amenity-laden retirement communities, and the median listing price for condos and townhouses fit your budget, according to Realtor.com data. Hereâs whatâs on the market now.
Myrtle Beach, South Carolina
Myrtle Beach, FL
Kruck20/iStock
If youâre ready to look beyond Florida, Myrtle Beach, S.C., with nearly 35,000 people, made Realtor.comâs 2018 and 2019 lists of affordable beach towns, and Murrells Inlet, just to the south and home to just under 10,000 people, made the 2020 list. The broader Myrtle Beach area, known as the Grand Strand, extends for 60 miles along the coast.
Summer temperatures in Myrtle Beach are a touch cooler than Florida; an average high of 88 in July, with lows averaging 74.
A word of warning: In the winter, average overnight lows get down to around 40, and average daytime highs reach the upper 50s. Is that acceptable, or too cold?
Myrtle Beach boasts of its low property taxes, especially when combined with the stateâs homestead exemption. While you may think of the city as a vacation destination, 20% of residents are 65 or older. (Nearly 32% of Murrells Inlet residents are seniors.)
Hereâs whatâs for sale now in Myrtle Beach and in Murrells Inlet.
The post We Want to Retire to Florida or a Florida-Type Atmosphere and Buy a Condo With Lots of Amenities for $250,000âWhere Should We Go? appeared first on Real Estate News & Insights | realtor.com®.
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