Avoid These Common Mistakes After Receiving a Large Inheritance

Avoid Impulsive Financial Moves

Receiving a large inheritance often comes at an emotionally difficult time. It’s natural to feel overwhelmed, but it’s critical to avoid impulsive decisions, like making luxury purchases or drastically upgrading your lifestyle. Instead of spending hastily, prioritize financial stability by paying off high-interest debts, such as credit card balances, which can have interest rates exceeding 20%. Taking a thoughtful, measured approach allows for better long-term financial outcomes.

Don’t Let Emotions Lead Financial Decisions

Many individuals struggle with guilt or emotional hesitation when it comes to using inherited money. However, applying those funds toward reducing debt or investing in future goals can provide long-lasting financial security. Avoiding lifestyle inflation and maintaining discipline in the first year after inheriting wealth can prevent regrets down the road.

Be Cautious With Investments and Financial Products

Some investment vehicles, like annuities, may sound appealing but could benefit the salesperson more than the investor. It’s important to fully understand the fees, risks, and limitations of any product before committing. For those nearing retirement, investing in real estate or paying off a mortgage may be more strategic uses of inherited funds.

Set Boundaries Around Sharing Wealth

While it may be tempting to help friends or family financially, it’s essential to first ensure your own stability. Support for children or other loved ones should align with your overall financial strategy. Prioritizing debt reduction, educational opportunities, and meaningful family experiences over cash gifts can lead to a more lasting impact.

Understand Tax Implications and Withdrawal Rules

Inherited assets can come with complex tax consequences. For example, inherited retirement accounts may be subject to required minimum distributions (RMDs) or the 10-year rule, depending on the relationship to the original account holder. Poor withdrawal timing can increase tax liabilities or even affect Medicare premiums through IRMAA (Income-Related Monthly Adjustment Amounts). Planning ahead with a financial advisor can help reduce surprises and improve outcomes.

Update and Protect Your Estate Plan

A large inheritance can significantly change your financial landscape, making it important to revisit your own estate plan. This includes properly titling new accounts, reviewing beneficiaries, and possibly setting up trusts, especially if you’re in a blended family or want to preserve assets for future generations. Avoid co-mingling inherited funds with joint accounts, as this can complicate ownership in the event of divorce. Keeping inherited assets in separate accounts and using tools like revocable living trusts can help ensure they remain protected.

Work with a  Financial Advisor

Navigating a large inheritance involves more than just managing money, it’s about planning for a secure future. A financial advisor can help you create a customized strategy tailored to your goals, whether that means investing, staying in cash temporarily, or using the funds to support long-term needs. With proper guidance, you can avoid common pitfalls and use your inheritance to build a lasting legacy.

What’s next for your inheritance?

An inheritance can be a powerful tool, but only when managed wisely. By staying patient, making informed decisions, and seeking professional advice, you can ensure that this financial windfall supports your long-term goals and benefits generations to come. If you’re ready to schedule a consultation to learn how to make the most of your inheritance, click here.