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5 Important Steps to Maximize an Inheritance

10 Minute Read

You may have a friend, or two, who has blown a large inheritance. Some of you may have also seen a news story about a lottery winner who went bankrupt (or worse) just a few years after receiving a life-altering sum of money. If you don’t want this to be you, keep reading as we share five tips to make the most of an inheritance or windfall.

Research has shown that when people come into money unexpectedly, they will treat it differently than the money they have earned. Even the most financially astute consumers can get trapped by their newfound wealth. Many feel pressure to splurge on new cars, bigger homes, or even taking their loved ones on dream vacations. Others may be emboldened to tell their bosses to take a hike and leave the workforce completely.

Many people regret rushing into major purchases after receiving an inheritance. Others find themselves giving away much of the money, or even making terrible investments that are completely inappropriate for their own goals and financial needs. If you don’t seek expert financial guidance in order to develop a plan for your inheritance, or take the time to do it yourself, you may find yourself worse off than you were before you became instantly wealthier via an inheritance.


Here are five financial planning tips for anyone who is receiving an inheritance or another windfall.

Spend Some Money on Yourself

I bet you thought I was going to start with sock all of it away for a rainy day. If you have lost a loved one, you need to do something nice for yourself. It doesn’t have to break the bank. The goal is to enjoy a small indulgence that will hopefully keep you from making some of the bigger mid-life crisis types of purchases that can derail your financial security.

Set aside a certain amount of money that you can use to splurge on whatever will bring you joy. Calculate how much you want to spend and on what. Without that seemingly simple step, you may find one small splurge turns into many. Before you know it, a large portion of your inheritance could be gone. Over the years, I’ve been referred to people who have inherited enough money to make them more than comfortably set for the rest of their lives. However, by the time they finally reached out for financial planning guidance, they had blown half, or more, of their inheritances. OUCH!

Don’t Forget About Taxes on Your Inheritance

It is rare for someone to receive an inheritance large enough to trigger the federal estate tax. Estate taxes will vary at the state level, so check with your financial planner about that topic. Depending on which type of assets you inherit and how they are held, you may owe taxes on some of your newfound wealth.

I recently spoke with a woman who inherited a paid-off home. She figured she could quit her job and live for free. While the house was paid off, she forgot about property taxes, maintenance, and utilities, which all in would still be higher than her current rent. That being said, she was going from a small one-bedroom to a gorgeous home with a pool. It was a big step up for her lifestyle, but without some other planning, it wasn’t quite enough wealth for her to quit her job, just yet.

Don’t Quit Your Day Job Just Yet

Millions of Americans work in jobs they dislike or for bosses who seem to do nothing but try and make their lives miserable. It may be tempting to make some big statement and tell your boss to shove it. Before you do, make sure you have thought it through and that you have a plan to replace your income.

It is easy to underestimate how much money you will actually need to provide a nice standard of living for the rest of your life. That number typically gets bigger the earlier you want to leave the workforce. If you retire at 40, you are going to be retired for a lot longer than someone who leaves the workforce at 75.

For those making $100,000, per year, you will likely need a retirement nest egg worth at least $2 million to replace your income. You may also get hit with some additional expenses you may not expect, like health insurance. Also, take a minute to think about this question. Without going to work every day, do you think you will spend more or less money?

I’m not saying you can never quit your job. I’ve helped many people turn an inheritance into financial freedom, and they were able to leave jobs that didn’t bring them joy. Some moved onto passion projects or careers. Others went back to school. Some just chose to spend more time with their kids. To make those changes successful and financially advantageous, they all had a financial plan. Their road maps included spending plans to account for the splurges and life changes they wished to make.

This Is Your Inheritance, Take Care of Yourself

When you strike it rich, people often come out of the woodwork asking for money. You may want to help some, but others may just be moochers who think they are owed something. Make sure your own financial house is in order before you commit to take care of others. I’ll exclude parents with minor children from this one; you are still expected to care for and feed your children. If your kids are in their adults, you can take the time to make sure you are financially secure before handing them money.

Keep in mind, some things that may sound like smart financial moves may not be right for you. I am talking about things like paying off your mortgage or even your child’s mortgage. You may want to pay off your childrens’ student loans or supercharge 529 plans for your grandchildren. Other inheritors may look to risky or illiquid business ventures, which can easily turn into money pits.

Look for ways to use your inheritance to bring you even more money in the future. Could you invest in your education to further your career or create additional income from a dividend producing portfolio? What will make you happier, healthier and wealthier?

An inheritance can be a great way to play catch up for retirement. Maxing out your workplace retirement plans can help you lower your current tax bills. It can also translate into a large income in retirement. The downside is retirement accounts can tie up your money until you are 59.5 or older. All the same, for those prone to blowing through money, this could be a good way to make it harder to spend all of your inheritance too quickly.

Consult your Financial Team to Maximize Your Inheritance

If you don’t have a fabulous financial planner, consider getting one. Most people aren’t used to dealing with large sums of money; an inheritance can be stressful and overwhelming. Your financial planner can help you develop a strategy to make the most of your inheritance and help you reach your various financial goals faster and easier.

For those of you who know an inheritance or windfall is coming your way, plan ahead. A huge sum of money sitting in your bank account could prove to be just a bit too tempting to leave sitting there. Rushing around to meet various IRS or tax filing deadlines will only increase your stress and chance of making a large financial mistake.


This article was written by David Rae from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to

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