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An inheritance can feel like a mixed blessing. There are many important financial decisions to make, but navigating your options during a stressful time can be overwhelming.
Unless you and your loved one discussed your inheritance prior to their passing, you probably have a lot of questions. How should you spend the money? Do you owe taxes? Should you pay down debt or invest for your retirement?
Thankfully, you don’t have to figure it out alone. Working with a fee-only financial advisor can offer peace of mind during a difficult time by providing expert advice on investments, retirement accounts, life insurance policies, taxes and more.
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How a financial advisor can help you with an inheritance
You’re bound to receive a lot of unsolicited advice from friends and family about how to spend your mew 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 strike a balance between improving your short-term situation and meeting 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 simply unsure about how to best use your new windfall, here are five ways a financial advisor can help.
1. Create a plan
There are plenty of stories about people blowing their inheritance on shopping sprees, lavish trips and new cars. It’s natural to want to indulge a little with your newfound money, but without a proper plan in place, you could quickly squander your inheritance.
The first step after receiving an inheritance is to create a solid financial plan. A financial advisor can help you assess your life goals and priorities, ensuring that your windfall doesn’t go to waste.
A fee-only fiduciary advisor can also analyze the makeup of your inheritance, which may include real estate, investments, cash, life insurance policies, collectibles or even a family business. By understanding the assets you now 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, like eliminating debt, with achieving long-term goals, like planning for retirement. For example, an advisor can help you invest part of the money for your children’s college expenses, or explore other wealth management strategies, such as funding a family trust.
2. Pay down debt and build an emergency fund
Bolstering your emergency fund and paying down high-interest debt are two common financial priorities.
If you have less than six month’s worth of living expenses set aside, a financial advisor might recommend putting part of your inheritance into a high-yield savings account for a rainy day fund. Alternatively, if you’re carrying a large credit card balance, your advisor might suggest paying this down as quickly as possible to avoid interest and fees.
3. Get tax advice
Navigating the tax implications of an inheritance can be daunting, but it’s important to get it right, since simple mistakes can lead to major financial setbacks.
First, some good news: There are no federal inheritance taxes. Usually, the estate will pay any estate tax owed, while beneficiaries receive assets free of income tax.
However, in six states, inheritance taxes may apply. Typically, the closer someone is to the deceased, such as a spouse, the lower their inheritance tax rate. Some states even allow an inheritance tax exemption, meaning a portion of your windfall will be tax-free before any inheritance tax applies.
A financial advisor can help you navigate inheritance tax laws. They can also explain the tax implications of selling investments and offer suggestions on how to reduce your tax liability.
4. Investment management
Most inheritances aren’t strictly cash — they’re also property and investments. Inheriting a home with a mortgage can be tricky, for example, because you may need to buy out other heirs. If assets are held in a taxable brokerage account, you’ll need to decide whether to liquidate the assets or leave them there indefinitely.
A financial advisor can use their expertise to select investments that align with your risk tolerance and long-term goals. For example, a young investor with decades until retirement who inherited their father’s bond-heavy portfolio might benefit by selling some of those assets and using the money to purchase stocks or ETFs instead.
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 may help you achieve better overall results than if you’d managed the portfolio yourself.
5. Navigate retirement accounts
If you inherit an individual retirement account, you’ll need to abide by a set of specific (and complex) tax rules, or else face potential IRS penalties.
How much you can withdraw from the account — and when — depends on several factors, including your age and your relationship to the account holder.
If you inherit an IRA from your spouse, for example, you can choose to make yourself the owner of the account or roll it over into your own retirement account. But other beneficiaries may be forced to withdraw all the money over 10 years or elect 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 an 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’re comfortable managing your own IRA, deferring to an expert in this situation could help you save a lot of time.
How to pick a financial advisor
You’ll want to make sure your advisor is a fiduciary, which means they’re working in your best interest. They’ll offer unbiased advice and won’t earn a commission from recommended investments.
You should also consider factors like an advisor’s qualifications, experience and fee structure. Some advisors charge a percentage of assets under management, while others opt for hourly or flat fees.
Additionally, seek recommendations from trusted sources and conduct interviews with potential candidates to ensure a good fit.
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 on an advisor’s credentials.
Receiving an inheritance can be a life-altering event. While it brings financial security, it also requires careful planning and decision making.
A financial advisor can be a valuable ally in navigating your new financial landscape. From creating a tailored 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.