6 Tips for Effectively Managing an Inheritance

Getting an Inheritance? 6 Steps to Managing it Responsibly

An inheritance can be both a gift and a source of stress. While unexpected money is always welcome, the circumstances surrounding it may cause some conflicting feelings about how to move forward. Learn how to manage an inheritance responsibly by following these six steps:

Step 1: Confront Your Emotions

Before you even get into the financial details of handling your inheritance, it’s first important to recognize the backdrop of emotion. Those on the receiving end of an inheritance often feel guilty that they didn’t make the money themselves. If it’s a result of someone passing away, they frequently question whether they deserve it, or wonder if they should have been more attentive to their loved one in their final days. Or perhaps the inheritance wasn’t as much as others received, and there are feelings of jealousy or envy. Whatever your situation, confront your emotions before making decisions.

Step 2: Take Your Time

Often people feel they have to do something with the money immediately. Instead you should think about it, digest, it and consider the possibilities. The worst thing you can do is make knee-jerk decisions. Work with your financial advisor to park it in a high interest account, or something similar that’s liquid and short-term while you take the time to make a plan.

It’s also important to note that you might not get the inheritance immediately, depending on what form it comes in. If it’s life insurance, the insurance company is free to pay out to the named beneficiary as soon as they receive the death certificate. But you will likely have to wait up to a year until the estate is settled before the rest of the distribution can take place. And if there's probate involved or any complexity or contesting of the will, it can take even longer.

Step 3: Gather Your Experts

You’ll want to talk to an accountant about tax implications, and consult a lawyer to determine how to ensure the inheritance is not considered family property so you can keep it separate in case of a potential divorce or future claim. And of course, you’ll need to work closely with your financial advisor to devise a strategy for how to manage an inheritance. Your advisor will work with you to determine your next move based on your goals and the form the inheritance takes (money, real estate, life insurance, pre-existing stocks, property, assets, or a combination of these).

Your financial advisor should help you determine what you’d like to do with the inheritance. Sometimes advisors are myopic and just look at investing the money, but my perspective is that you need to examine your life goals and consider how the money is going to help achieve those. Perhaps you want to pay off debt? Maybe you’d prefer to put the inheritance towards a nest egg for the future? Or maybe you’d like to pay for a young relative’s education, or donate it to charity? Different goals require different strategies.

Step 4: Assess the Tax Situation

Once you’ve set your goals, your advisor will help you achieve them in the most tax-efficient way possible. If you’d like to pay for a child’s education, you’ll want to contribute to an RESP or set up an intrust account. If you want to donate your inheritance to a charity, donate securities to avoid capital gains tax and replace them with cash for investment. Working closely with your advisor will enable you to benefit from their years of experience.

Step 5: Be Firm with Those Around You

If you experience a sudden windfall, don’t be surprised by people coming out of the woodwork looking for handouts. Before this happens, devise a plan for how you’re going to respond to these sorts of requests. In my experience, it’s best to be pragmatic and straightforward. There’s nothing wrong with saying “I've earmarked x amount to help other people, I have a plan to do so, and unfortunately your request doesn't fall within my strategy." People tend to respond better if you are approaching it from a strategic, business-like standpoint so it appears like you've thought about it carefully.

Step 6: Treat Yourself

While it’s important to work with an advisor and develop a comprehensive plan for your inheritance, it’s equally important to recognize that this is good news. Whoever left it to you would probably be very happy to know that you treated yourself. Use a bit of it on something you wouldn't normally splurge on, whether it’s a nice dinner, a vacation, or a new property. In my case, I inherited unexpectedly from my uncle and it was enough to buy a new car. It was a big treat and when I drive it I always think of him and thank him.

An inheritance should serve a purpose and be put to good use. This is a dangerous field to go it alone, but having the right advice and knowledge from experienced professionals will allow you to advance your life goals and better appreciate this gift.