2015-05-19 | US New - Money

The Right Way to Handle an Inheritance


If you are fortunate enough to receive an inheritance, buy a nice bottle of Champagne and toast your benefactor. But then institute a cooling-off period before you start spending, financial advisors recommend. A new car, vacation or kitchen renovation may be in your future, but make sure you carefully assess your financial picture and retirement planning goals so you can maximize the inheritance and develop a financial plan. In the meantime, you could park the windfall in a high-yield savings account or a balanced mutual fund for six months or so to sort out your priorities.

"Don't go out and quit your job, give money to your family and friends or buy that new Bentley before you determine how wealthy you really are," says Marcus Miller, an advisor at Indianapolis-based Deerfield Financial Advisors.

Minnium says she worked with a married couple in their mid-30s who received an inheritance of about $80,000. "They mindlessly spent away about $5,000 because they got excited,” she says. “See an advisor who can take a global look at your financial situation. Formulate a financial plan so you can see what the best use of those resources will be.”

Here are the best ways to handle an inheritance, according to advisors.

Create a list of financial goals. Prioritize and address any bad financial habitsconsider the interest rate and compare that to an expected investment return. "If the debt is at a relative high rate, say over 5 percent, probably you should consider paying it off,” Schultz says. “But if it is a low-rate mortgage, and you are relatively young with decent employment prospects, you'd probably be better off investing.”

For example, look at the after-tax rate of interest you are paying on your mortgage. "If you are in the 25 percent tax bracket, paying 4 percent on your mortgage, you receive a tax deduction for part of the mortgage, which means you are really only paying a 3 percent interest rate," Miller says. Compare that to a diversified portfolio of stocks and bonds that could earn 6 percent to 7 percent annually, he says.

Retirement savings. Next in line is investing in your retirement savings accountsDeploying that inheritance wisely can help you climb onto firmer financial footing and lay the groundwork for a more secure future.