An inheritance can feel like a mixed blessing. There are many important financial decisions to be made, but navigating your options during a stressful time can be overwhelming.
Unless you and your loved one discussed your estate before their death, you probably have a lot of questions. How should you spend the money? Do you owe taxes? Do you need to pay off debts or invest for your retirement?
Fortunately, you don’t have to figure it out alone. Working with a fee-only financial advisor can provide peace of mind during a difficult time by providing expert advice on investments, retirement accounts, life insurance, taxes and more.
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How a financial advisor can help you with an inheritance
You’ll no doubt get a lot of unsolicited advice from friends and family about how to spend your meow inheritance. A financial advisor can cut through the noise with an objective third-party perspective; a valuable resource when emotions are running high and you’re not sure what to do with your inheritance.
A good financial planner will help you find a balance between improving your short-term situation and achieving your long-term goals. They’ll look at your unique needs and help you create a plan that works for you.
If you’re confused, grieving, or just not sure how to best use your new windfall, here are five ways a financial advisor can help.
1. Make a plan
There are plenty of stories about people squandering their inheritance on shopping, luxury travel and new cars. It’s normal to want to enjoy your new money a little, but without a good plan you can quickly squander your inheritance.
The first step after receiving an inheritance is to draw up a solid financial plan. A financial advisor can help you assess your life goals and priorities so that your windfall doesn’t go to waste.
A fee-only fiduciary advisor can also analyze the makeup of your estate, which may include real estate, investments, cash, life insurance policies, collectibles or even a family business. By understanding the assets you currently own, you can make smart decisions about how to spend, save or invest the money.
A financial advisor can also help you address short-term needs, such as eliminating debt, and achieve long-term goals, such as planning for retirement. For example, an advisor can help you invest some of the money in your children’s college costs, or explore other wealth management strategies, such as financing a family trust.
2. Pay off debt and build an emergency fund
Strengthening your emergency fund and paying off high-interest debt are two common financial priorities.
If you have less than six months’ worth of living expenses set aside, a financial advisor may recommend putting a portion of your inheritance into a high-yield savings account for a rainy day fund. If you have a large credit card balance, your advisor may also suggest paying it off as quickly as possible to avoid interest and fees.
3. Get tax advice
Understanding the tax implications of an inheritance can be difficult, but it’s important to get it right because simple mistakes can lead to major financial setbacks.
First of all, good news: there are no federal estate taxes. Normally, the estate pays any inheritance tax liability, while the beneficiaries receive assets that are free of income tax.
However, estate taxes may apply in six states. The closer someone is to the deceased, such as a spouse, the lower the estate tax rate usually is. Some states even allow estate tax exemptions, meaning part of your windfall is tax-free before estate taxes apply.
A financial advisor can help you navigate estate taxes. They can also explain the tax implications of selling investments and make suggestions on how to reduce your tax liability.
4. Investment management
Most inheritances are not merely cash; they are also properties and investments. Inheriting a home with a mortgage can be difficult, because you have to buy out other heirs, for example. If assets are held in a taxable investment account, you must decide whether to liquidate the assets or leave them there indefinitely.
A financial advisor can use their expertise to select investments that match your risk tolerance and long-term goals. For example, a young investor who still has decades to retire and inherited his father’s bond-heavy portfolio might benefit from selling some of those assets and using the money to buy stocks or ETFs instead. buy.
Or, if you choose to stick with the original portfolio investments, a financial advisor can monitor those accounts and meet with you once or twice a year to provide updates.
If you don’t have much investing experience, working with an advisor can help you achieve better overall results than if you managed the portfolio yourself.
5. Navigate retirement accounts
If you inherit an individual retirement account, you must adhere to a set of specific (and complex) tax rules or face potential IRS penalties.
How much you can withdraw from the account – and when – depends on several factors, including your age and your relationship with the account holder.
For example, if you inherit an IRA from your spouse, you can choose to make yourself the owner of the account or transfer it to your own retirement account. But other beneficiaries may be forced to withdraw all the money over a ten-year period or choose to take a lump sum distribution.
There’s a lot to unpack with inherited IRAs, including navigating required minimum distributions and determining whether you’re a designated beneficiary or a beneficiary. eligible designated beneficiary.
Speaking with a fee-only financial advisor can help you devise a withdrawal strategy that minimizes taxes and avoids penalties. Even if you feel comfortable managing your own IRA, deferring to an expert in this situation can save you a lot of time.
How to choose a financial advisor
You want to make sure your advisor is a fiduciary, meaning he or she is working in your best interests. They provide impartial advice and do not earn commission on recommended investments.
You should also consider factors such as an advisor’s qualifications, experience, and fee structure. Some advisors charge a percentage of the assets under management, while others opt for hourly or fixed fees.
Additionally, ask for recommendations from trusted sources and conduct interviews with potential candidates to ensure a good match.
There are many ways to find a financial advisor near you, including online databases and search tools. You can also use the CFP Board website or the CFA Member Directory to check an advisor’s credentials.
In short
Receiving an inheritance can be a life-changing event. While it provides financial security, it also requires careful planning and decision-making.
A financial advisor can be a valuable ally as you navigate your new financial landscape. From creating a customized financial plan to providing tax insight and managing investments, their expertise can not only give you peace of mind but also help you grow your wealth over time.
