What To Do When You Inherit Money

More and more people I meet inherit money from other people. That’s because the people who came before us were very good at saving and investing. From a financial perspective, it’s a good problem to have of course. But it isn’t all chocolate and strawberries. In fact, receiving an inheritance often comes with its own set of very real problems.

Based on my experience, here is a short list of the main challenges people who inherit significant assets have to deal with:

1. Sibling rivalry

Regardless of how assets are split up, somebody is going to think they got a bad deal. Sadly, there is nothing you can do to completely eliminate this problem but you can ameliorate it. You do that by talking about the subject early and often. If you and your sibs stand to inherit from your parents, get your parents involved in the conversation too.

2. How soon should the money be invested?

If you receive a sizeable inheritance it may be more money than you are used to handling. That can be frightening and intimidating at first. If you do get “up tight”, the solution to this problem is to take it down a notch.

Let me share a recent experience that illustrates this point pretty well. About a month ago I got a frantic call from Sally. She’s 47 and has a small business giving piano lessons. She led a happy but modest financial life. She called me because she inherited $150,000 from her grandparents and was in a panic.

That was more money than Sally ever dreamed of having and she had no idea what to do with it. People bombarded her with different ideas and she was thoroughly confused and stressed.

The first thing I suggested to Sally was to slow down. She didn’t have to do anything with the money right away. There was no ticking clock. She needed time to cool it. I suggested that she forget about the inheritance completely for a month. We made an appointment for 30 days later and that was just enough time for her to approach the topic calmly.

You may or may not need time to get your head around the new situation. If you do, don’t be afraid to take as much time as you need. And if anyone pressures you, that’s just their way of telling you to find someone else to talk with.

Does any of this confuse you?  If so, connect with me. with your question.  I may be able to clear things up quickly.  I want to make sure you have this right because it’s just that important.

3. Not knowing how to invest the money.

You might be as calm as a cucumber. But if you aren’t familiar with investment strategies, how investments work and personal finance, you might need a little help. There are plenty of sites on the internet to get free information and you should take advantage of those great resources.

If you also want to get professional help, make sure you understand how financial advisors work before you get advice from anyone. And by the way, even if you do end up hiring an advisor, you’ll be better off if you educate yourself on the basics. That step is empowering no matter how you slice the cake.

If you want to do this right, run a financial plan. This may sound out of your comfort zone but it’s not that bad. Here’s a link to a post I wrote explaining how to run your own financial plan for free.

4. Income tax worries.

Good news. This is a problem you can scratch off our list. In 99% of the cases, you don’t have to worry about paying taxes on money and assets you inherit. That’s because the trustee (if it’s a trust) or executor (if it’s a will) is only supposed to disburse money once any and all income and estate taxes are paid. That means the chances are very high that once you get your check – it’s yours to do with what you like.

If you want to be double sure that all the taxes have been taken care of, just get confirmation from the tax and/or legal professional handling the estate.

5. Fear of making a mistake or letting others down.

This problem doesn’t impact every inheritor. And it can manifest in different ways. By far, the request I hear more than any other is to hold on to (at least some) of the inherited securities even if there is no financial reason to do so.

I met Loretta 12 years ago when she inherited 400 shares of Pitney Bowes from her dad. She wanted to hold those shares to show respect for her father and I absolutely “get it”. But the financial cost of that was high. In the last 5 years, the stock has tread water while the S&P has gained over 120%.

My suggestion is to hold on to personal items and cherish them. But if you want to honor to the person who worked hard to provide the financial gift, honor the work that went into creating the wealth. You do that by safeguarding the economic value stored in that stock or asset. If the current holdings don’t safeguard the wealth, find a different asset that will.

Inheriting money is an honor and a privilege. Show how much you value the gift by using the money and assets to their highest and best use. First make sure you understand the basics of personal finance. Next, take time to understand your own situation and how that money would most benefit you and your family. Slow down and only pull the trigger when your emotions are manageable and you understand the steps you are taking.

What has been your experience? Have you inherited assets? What problems/opportunities did this bring up? How did you deal with these issues? Please leave a comment below.