I’ve inherited $200k, what should I do?

Can inheriting money truly change your life for the better, or could it create unforeseen financial pitfalls? On this episode of A Wiser Retirement® Podcast, Casey Smith, Missie Beach, CFP®, CDFA®, and Shawna Theriault, CFP®, CPA, CDFA® talk about what to do if you inherit $200k.

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Summary

Inheriting money can be both a blessing and a burden. While exciting, the sudden influx of cash can also bring about a slew of decisions that need careful consideration. In this episode, they delve into the best ways to utilize an inheritance wisely.

Assess Your Financial Situation

First and foremost, it’s crucial to evaluate your current financial situation. Inheriting $200,000 can have different impacts depending on individual circumstances. For some, it might be a life-changing amount, while for others, it may serve as a financial cushion. Begin by assessing your overall financial health and identify any areas that need attention.

Pay Off Debts

One of the primary recommendations is to use the inheritance to pay off existing debts. This includes mortgages, credit card debts, student loans, and other liabilities. Clearing these debts reduces financial stress and frees up cash flow for other uses. It’s also important to change spending habits to avoid accumulating debt again in the future.

Build an Emergency Fund

Another wise use of an inheritance is to establish or bolster an emergency fund. Having three to six months’ worth of living expenses saved can provide a financial safety net for unforeseen circumstances, such as job loss or medical emergencies.

Invest in Education

Education is a powerful tool for elevating the next generation. Use part of your inheritance to pay off existing education debts or to fund future educational endeavors. Investing in education can create lasting benefits and opportunities for both you and your loved ones.

Consider Tax Implications

There could be tax consequences associated with various inherited assets. For example, inheriting cash or a brokerage account typically does not incur an inheritance tax. Stocks within a brokerage account receive a step-up in basis, meaning you won’t owe taxes on the appreciated value. Consult a financial advisor or CPA to understand the specific tax implications of your inheritance.

Set Financial Goals

Before making any major decisions, it’s important to set clear financial goals. Whether it’s accelerating existing plans like paying for education or legacy planning, having defined objectives can guide your decision-making process.

Avoid Hasty Decisions

Avoid rushing into actions like selling property or co-mingling funds in joint accounts, as these can lead to complications in case of marital discord or divorce. Keeping the inheritance in an individual account and setting up a transfer on death to the next generation as separate property is recommended.

Seek Professional Advice

Throughout the discussion, they underscore the importance of consulting a financial advisor. Personalized advice can help tailor decisions to your unique situation, removing emotional bias and ensuring a strategic approach to managing your inheritance.

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