4 Tips for When You Are Expecting an Inheritance

February 26, 2020 · 5 minute read

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4 Tips for When You Are Expecting an Inheritance

Receiving an inheritance can be bittersweet. Of course, coming into a valuable asset can have a positive impact on your financial life. But this type of gift often comes as a consequence of a loved one passing away.

The circumstances around getting an inheritance can mean that you already have a lot on your mind. You might be in shock, grieving, or figuring out the logistics of arranging a funeral or dealing with an estate.

It may not be easy, but it’s important to plan ahead for the windfall and think about your next steps carefully. In some circumstances, you may even find out in advance what types of assets you stand to receive and their value. Here are some tips for those expecting an inheritance:

1. Tempering Your Expectations

According to a recent survey, one in three Americans are counting on an inheritance in order to achieve financial stability. Among young people, relying on a future windfall is even more common, with nearly 70% of millennials anticipating inheriting money from grandparents or parents.

However, only 40% of millennials’ parents report planning to leave assets to their children, meaning there is a huge gap between expectations and reality. Even if you do end up getting something, the lack of certainty about what the assets will be worth and when you’ll get them means it’s not a replacement for saving and investing.

In many cases, it’s a good idea to consider an inheritance a nice-to-have-bonus, not a foundation for financial well-being.

2. Preparing Emotionally

Getting an inheritance isn’t always a smooth process. A recent poll by one wealth management firm revealed that 44% of estate planning professionals reported that family squabbles were the biggest threat they dealt with.

Hopefully, you won’t encounter drama, but it may be worthwhile to prepare yourself emotionally for this possibility.

One way to prevent issues from emerging is by checking in with older relatives to make sure they have a clear estate plan and keeping the lines of communication open with other family members.

3. Learning How Inheritance Works

Closing someone’s estate can be a long process. The first step is locating the deceased person’s estate planning documents, such as their will and any revocable living trusts, as well as other important records, such as bank statements and life insurance policies.

Then, the estate may need to go to probate, which is the process, overseen by a court, of authenticating the will, figuring out the value of the deceased person’s assets, paying any debts or taxes, and then distributing the remainder to beneficiaries.

In a simple situation, this process can take just a few months. But if things get complicated, you could be waiting a year or more to get your inheritance.

4. Not Making Rash Decisions

When a valuable asset falls into your lap, you may feel pressure to decide what to do with it right away.

But taking it slow may be a better path. Emotions are likely to be running high, so it can be a good idea to wait until you can think clearly.

It can also make sense to review your current financial plan before figuring out what to do with the inheritance.

That way, you can see where you stand on the path to your goals and how the new addition fits in.

Ideas for What You Can Do with Inherited Money

When you’ve finally gotten your inheritance and are emotionally ready, it’s time to figure out what to do with it.

You may be tempted to blow it all on clothing, a nice car, or a dream vacation. Before you do, consider these options for where to put money after receiving an inheritance:

Building an Emergency Fund

According to a recent study, 40% of Americans can’t afford to cover an unexpected expense of just $400. And emergencies do happen, from car trouble to unforeseen medical bills.

If you don’t already have one, an inheritance can help you build or beef up an emergency fund. Ideally, your emergency fund will have three to six months of living expenses.

Paying Off “Bad” Debt

If you have outstanding debt, such as credit card balances or personal loans, you may consider using your inheritance to pay it off. Debt with an interest rate greater than 7% is considered bad debt, and the interest you pay over time will really add up.

Targeting bad debt with an inheritance is a great way to improve your financial picture. It may be tempting to pay off all of your debt with an inheritance, but you should consider investing the money before paying off good debt such as mortgages or student loans.

These types of debt typically come with low interest rates, that over the long run has been less than the return of investing in the stock market.

Having Fun—Responsibly

If you’re in good shape financially, you may be toying with the idea of spending some of your inheritance money. Your loved one left the money to you, probably in hopes that it would make your life better. Financial security is important, but that doesn’t mean you can’t use some of the money to enjoy yourself or invest in your dreams.

That might mean taking a trip around the world or turning a life-long side hustle into a small business. If you’re planning to spend your inheritance, the key is to do so in moderation, and only once you are financially secure.

Investing It

Investing allows you to take advantage of the power of compound interest to grow your wealth. The longer your money is in the market, generally speaking, the more of an impact compounding interest may have on your financial life.

If you’re focused on retirement investing, you can do this through an employer-sponsored 401(k), if one is available to you.

Otherwise, you can invest through an IRA, Roth IRA, or if you’re self-employed, a SEP IRA. All of these funds allow you to invest in a mix of assets, including stocks and bonds, based on your tolerance for risk and your target retirement age.

An online retirement calculator can help you figure out whether you’re on track. If you have other goals, you can consider investing through a 529 college savings plan for your children or opening a brokerage account.

Confused about your inheritance? Consider SoFi Invest®, which provides you complimentary access to our licensed financial advisors.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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