Navigating Inheritance: Strategies for Managing Your New Wealth

October 18th, 2024

Estimated Reading Time: 7 Minutes

Receiving an inheritance can be a life-changing event, bringing both opportunities and responsibilities. Whether it’s a modest sum or a significant estate, understanding how to manage your newfound wealth is crucial for developing long-term financial stability. In this blog post, we’ll explore strategies for making informed decisions to manage your inheritance effectively.

Understanding the Emotional Impact of Inheritance

Before diving into financial strategies, it’s essential to acknowledge the emotional aspect of receiving an inheritance. When an inheritance comes during a difficult time, it’s natural to experience a mix of emotions. It’s important to take some time to process your feelings and reflect on your loved one’s legacy before making any significant financial decisions. Being aware of your emotional state can help prevent you from making any rash financial decisions that might negatively impact your wealth in the long-term.

Key Strategies for Managing Your Inheritance

1. Don’t Rush Your Decisions

One of the most important things to do after receiving an inheritance is to pause and evaluate your situation. Avoid making impulsive decisions. You might be tempted to indulge in expensive, large purchases such as your dream car or house. However, it is important to take time to thoroughly analyze and consider your current financial situation and long-term goals before using the newfound wealth. An inheritance can be an important tool used to help you achieve the life you have been striving for. Instead of making rash decisions, give yourself time to think about your long-term wealth management plan and how this inheritance fits into it.

2. Assess Your Financial Situation

Before you allocate your inheritance, take stock of your current financial health. Analyze your current income sources, account allocations, and monthly expenses. Consider:

  • Debts: Inheritance can be used to pay off high-interest debts, like credit cards or previous loans, to reduce financial stress and free up cash flow.
  • Emergency Fund: You could contribute an inheritance to an emergency fund. It is normally recommended that an emergency fund covers 3-6 months of living expenses, however, this can vary depending on your unique situation.
  • Retirement Savings: Consider directing some of your inheritance to your retirement accounts. It can help you catch up if you are behind on retirement contributions, or it can help you enhance your retirement plan.

3. Create a Clear Budget

Once you’ve assessed your financial situation, develop a budget that incorporates your inheritance. This is a good time to take note of what short-term purchases, if any, are worth indulging in and will also allow you to maintain your long-term goals. Allocate funds for:

  • Short-term needs and wants (travel, home improvements).
  • Long-term investments (stocks, bonds, real estate).
  • Charitable giving, if it aligns with your values and financial goals.

4. Consider Tax Implications

Inherited assets can have various tax implications depending on the type of asset and local laws. Familiarize yourself with the following:

  • Income Taxes: Inherited assets may generate taxable income, such as dividends or interest. Consult a tax professional to understand your obligations.
  • Estate Taxes: Depending on the size of the estate, there may be estate tax implications that could affect your inheritance.

5. Invest Wisely

Investing inheritance wisely can be a powerful way to grow your wealth over time. By allocating your funds into diverse investment options—such as stocks, bonds, private or alternative investments—you can take advantage of compound interest and potential market growth. This strategic approach not only helps preserve your capital but also increases its capacity to generate additional income.

6. Give Back: Charitable Contributions

If you’re inclined to donate, consider allocating a portion of your inheritance to charitable causes that matter to you. Not only can this help others and allow you to give back to your community, but it may also offer tax benefits. Donating to charity can be a meaningful way to honor the memory of who gave the inheritance to you.

If you do decide to donate to charity, consider the different vehicles available to you to see how to optimize the impact of your gift. These vehicles may include:

  • Cash Donations
  • Donor-Advised Funds (DAFs)
  • Charitable Trusts (including Charitable Remainder Trusts and Charitable Lead Trusts)
  • Etc.

7. Consult a Financial Advisor

Working with a financial advisor can provide valuable guidance tailored to your specific needs. They can help you:

  • Create a personalized investment strategy.
  • Understand tax implications related to your inheritance.
  • Develop a comprehensive wealth management plan that aligns with your long-term goals.

Conclusion: A Legacy to Build Upon

In conclusion, receiving an inheritance is a significant event that can offer both opportunities and challenges. By taking the time to assess your financial situation, consulting with a wealth management professional, and creating a thoughtful plan, you can align your newfound wealth with your long-term financial goals. Whether you choose to pay down debt, invest for the future, or give back to your community, making informed decisions now will help you honor your loved one’s legacy while protecting your financial future. Remember, patience and strategic planning are key to discovering the benefits of your inheritance. Receiving an inheritance is not just about the money; it’s about the legacy left behind. By taking a thoughtful approach to managing your new wealth, your inheritance can be a powerful tool for building your wealth.

Sources:

Important Disclosure Information

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.