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Being a beneficiary of a person’s estate and receiving an inheritance brings with it mixed emotions after the loss of a loved one. While losing a loved one is heartbreaking, the influx of funds can help ease financial burdens. It can be hard to think about or plan for, but anticipating how you’ll handle a sudden (and sometimes significant) inheritance can help you avoid these common pitfalls.
Being Unaware of Tax Implications
One thing that shocks many beneficiaries is suddenly realizing that their inheritance brings with it some tax implications they may not have accounted for. Depending on the size and type of inheritance you receive, you may jump into a higher tax bracket. You may even be responsible for paying capital gains taxes on the monies you’ve received. Whenever you receive any kind of inheritance, it’s a good idea to talk with a financial advisor who can inform you of potential tax complications before you allocate those funds elsewhere in your budget.
Spending an Inheritance without Making a Budget
For many of us, receiving a large amount of money can inspire us to start thinking about spending it on all the things we’ve been dreaming about but couldn’t afford — perhaps a new car, larger house, or luxurious family vacation. Even if the purchases don’t seem all that big, the costs add up quickly, especially if items purchased have additional costs, such as maintenance and insurance. If you don’t have a budget and are not used to managing money, you may be surprised how quickly you can spend through even a substantial inheritance.
Creating a budget and plan can help you hold on to your inheritance longer. Stay grounded and think about whether or not you really need what you’re thinking of buying. Also consider how much more money you could have in the future if you invest the money instead of spending it now. If you know how much you will inherit before you receive it, you can create a budget to make it last.
Not Using Inheritance to Pay Off Debts
Because the interest rate on debts is so often significantly higher than the interest rate you can earn on your money, one of the smartest things you can do after receiving an inheritance is pay off any high-interest debts. These often include credit cards, vehicles, student loans, and even mortgages. Paying these off will give you more freedom in your budget to do other things. All too often, beneficiaries are more focused on the things they want to do with their inheritance that they overlook the benefits that come with paying off their debts.
Losing Other Income Sources
For people receiving asset-based or income-based government benefits, such as disability payments or Supplemental Security Income (SSI), receiving an inheritance could disqualify them from the benefits. When creating an estate plan, many people will make a specific plan that is structured in such a way that will not impact a beneficiary’s ability to continue receiving these government-funded benefits. This often includes establishing a trust that will house the beneficiary’s inheritance to avoid impacting their eligibility for these benefits.
Not Helping Your Inheritance Grow
For people unaccustomed to having a large amount of money, it may be difficult to know what needs to be done to help it grow. All too often, beneficiaries will put their inheritance into a low-yielding savings account and slowly chip away at it until it’s gone. However, a financial advisor can offer some insight into how you can invest your money to create a balanced portfolio that will help your inheritance grow.
Failing to Protect Your Inheritance
People get caught up in receiving an inheritance and forget to take important steps to protect the legacy that was passed down to them. However, an estate planning attorney can help create a structured plan that protects your inheritance from potential creditors. Your estate plan will also memorialize your wishes regarding how your funds are handled after your death.
At Pierce Legal, we get to know each of our clients, gaining a meaningful understanding of and relationship with you that allows us to create a thorough estate planning strategy that will satisfy all of your planning goals and needs. Our practice provides professional legal advice and guidance focused in the areas of asset protection through proper estate planning, business services, and real estate assistance. Contact us today to schedule a consultation at (330) 588-6115.