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Inherited Money — A windfall that can last or quickly be in the past


By Judy Loy, ChFC®, RICP®

Inheriting money is a windfall for most people. Some people who inherit money go on a spending spree by taking an expensive trip, buying a luxury car, or putting an addition on the house. Before any decisions are made, however, it is important to take stock of your entire financial picture and make decisions based on your age, income, current assets, family obligations, and lifestyle.

The most important starting point is a strategy. Don’t act rashly when making decisions. Take time to think about your long-term financial goals and short-term financial needs. Buying that expensive car might sound good, but the money can quickly be spent. When you really evaluate your situation, other priorities might be higher on your list.

First, you'll want to understand how inheritance tax will affect the total you will receive. Money needs to be set aside to pay for state taxes and possibly federal taxes. Pennsylvania has different rates for different familial relationships of heirs. The rate is zero for spouses and dependent children under the age of 21. All other heirs have taxes to consider. In 2012, Federal inheritance tax is only paid on estates worth more than $5 million. In 2013, the estate value reverts to a $1 million level, which will affect a lot more people. It can be tricky if the inherited assets are not liquid, such as a valuable family home that needs to be sold in order to share the profit with multiple heirs.

Second, consider your entire financial situation. Do you have high-interest rate credit cards? This is a good time to get rid of bad debt. One way to avoid future credit card debt is to start an emergency fund, a readily-accessible fund to be used for unexpected expenses, such as a major care repair. If possible, take some of your inheritance money and put the value of three- to six-months living expenses into a savings account or money market account.

Insurance, college planning, home repairs, mortgage payments, and retirement are other financial areas to consider. The level of importance that you place on each one is a personal decision. Keep in mind the old adage that you can borrow for college but not for retirement.

You might think about using your inheritance to pay off a mortgage. Before doing this, consider the current interest rate on the loan and the tax deductions on the interest paid. Sometimes putting money in other investments, versus paying off a mortgage, can be a better financial move.

An investment advisor can prepare a document for you called a “retirement planner” that looks at all your assets, debts, and income sources to help you evaluate how an inheritance might be invested. This document can also give you a better understanding of your retirement options.

Overall, it is difficult to lose a loved one. Take the opportunity to get yourself on the right financial path and don’t spend an inheritance based on emotions. Ask an investment advisor or tax consultant for advice on how to handle your inheritance wisely.


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