Inheriting $1 million may sound like a blessing. But most people who receive an inheritance experience confusion, anger, sadness or some combination of the three, according to the Financial Planning Association. If you are a beneficiary grieving the loss of a loved one, here are some simple steps to make sure that the emotional toll does not end up a financial one as well.
Take a breather. Whether the amount is small or large, chances are that your inheritance will be unexpected. Emotions tend to run high. Avoid snap decisions. Rather than quit your job or buy a new sports car, take a step back and think about your goals.
Seek assistance. A qualified financial professional can offer sound guidance, especially if you are not used to managing large sums of money. An adviser can help you develop a clear understanding of how your inheritance affects your financial situation and develop a plan of action.
Safeguard the money. Instead of depositing cash into your personal checking account, consider putting the funds into a money market deposit account or a certificate of deposit.
Be wary of taxes. The value of inheritances is generally excluded from gross income. After that, calculating your tax liability can be tricky. Say you inherit a portfolio of diversified securities. Its value, known as its cost basis, is equal to the fair market value of the assets on the date of the decedent's death. If that value rises because of dividends, interest or appreciation, you can be liable for capital gains taxes on the increase if you sell. Seek out a tax adviser and financial planner to help you make sense of your sudden windfall.
Spend wisely. Remember that sports car? Put it on hold. Perhaps the largest benefit you can receive from an inheritance is to reduce your current debt. Pay off car loans, student loans, credit card debt or a mortgage. Consider using your inheritance to build a rainy-day fund for emergencies. Advisers usually recommend that you have enough liquid assets on hand to cover three to six months' worth of living expenses.
Think about saving some money. Why not add to your retirement account? For 2015, the contribution limits for a 401(k) plan and an individual retirement account are $18,000 and $5,500, respectively. Higher contribution limits are available for those over age 50.
By taking these initiatives, you will have more time to figure out the future and hopefully count on your inheritance to pay dividends for years to come.
Kimberly Nguyen writes for AdviceIQ.