While the majority of my time is spent helping clients decide how they want to pass down an inheritance to loved ones, I also consult with clients who recently received an inheritance from someone else. While receiving an inheritance can be a life-changing event that secures your future with a financial boost, it is important to use caution and plan carefully with an inheritance. To help you keep your inheritance secure, let me discuss five common mistakes to avoid if you receive an inheritance.
An inheritance can provide significant financial benefits, but it also requires careful management. Working with an experienced financial advisor and estate planning attorney is the best way to avoid making common mistake.
Common Inheritance Mistakes
- Spending Without a Plan
It can be tempting to splurge on luxuries or make impulsive purchases when you receive a large sum of money. However, spending without a plan can quickly lead to financial trouble. Before you make any major decisions, take the time to evaluate your financial situation and consider your long-term goals. Better yet, work with a financial advisor to create a plan that balances immediate spending with the need for long-term financial security. - Neglecting to Pay Off Debt
When you receive an inheritance, one of the first things you should consider is whether you have any outstanding debt. Paying off high-interest debt, such as credit card balances or personal loans, can be a smart move. By eliminating high-interest debt, you’ll save money in the long run. And, when you reduce your debt burden, you free up more of your income for savings and investments. This will grow your inheritance rather than drain it with interest payments. - Failing to Consider Tax Implications
An inheritance might come with tax consequences that could significantly impact the amount you ultimately receive. Depending on the type of assets inherited and the state you live in, your inheritance may be subject to estate taxes, inheritance taxes, or capital gains taxes. You may also move to a higher tax bracket if you inherit a retirement account, such as an IRA. This is because some IRAs come with required minimum distributions (RMDs) that could increase your taxable income. Consulting with a tax professional is crucial so that you understand the taxation of your inheritance and avoid surprises or costly mistakes. - Ignoring the Importance of Asset Protection
Without proper planning, your inheritance could be at risk from creditors, lawsuits, or even divorce. Asset protection strategies, such as setting up the right type of trust, can help safeguard your inheritance from these potential threats. If you are married, you may want to consider keeping the inheritance in a separate account. This would prevent it from being considered marital property in the event of a divorce. Working with an experienced estate planning attorney is the best way to decide what assets protection tools and strategies will work best with your inheritance. - Overlooking the Need for an Updated Estate Plan
If you recently received an inheritance, it is a good idea to review and update your own estate plan. If you don’t have one yet, this is the time to create your estate plan. As your financial situation changes, your estate plan should reflect your new circumstances and goals. You may wish to update beneficiary designations, revise your Will or trust, or adjust your charitable gifting within your estate plan.
Do You Want Help Avoiding Mistakes with an Inheritance?
If you need assistance with an inheritance you recently received, contact one of the Chapel Hill, North Carolina estate planning attorneys at Clarity Legal Group. Call us at 919-484-0012 or contact us online.
