This is an article from the Law Offices of Cheryl David (https://cheryldavid.com/) in Greensboro, North Carolina, that we thought others may find helpful.
You want to be wise about investing your new inheritance. After all, it’s a windfall and you may be thinking about putting it into taxable accounts or property assets, so take a step back to consider some tips on what to do.
There’s a difference between estate taxes and inheritance taxes. Thanks to the new tax law, only the very wealthy are at risk when it comes to the federal estate tax. However, several states also levy estate taxes and the thresholds may be much lower than with the feds. Executors usually remit any estate tax before you get your part of it.
A handful of states have inheritance taxes, which are on each individual heir, rather than the estate as a whole. However, you may avoid these in some instances if you are a close relative of the deceased.
Watch out for pitfalls
People often think of inheritances as found money and put them in a different mental category than they place regular income. You may find yourself in a “failure to save” situation: Your cash balance spikes and so you spend a little on splurges instead of considering the fine long-term savings habits you had before the inheritance.
Or you could easily get into bad spending behaviors — you may overextend yourself, perhaps using the money for a down payment on a bigger house, thereby expanding your monthly expenses by assuming higher property taxes, home maintenance costs, homeowner’s insurance and monthly utilities — all while your income remains the same.
Consider your financial goals
Put your assets to work. Look seriously at your short- and long-term goals. With goal-based investing, you match your time horizon to your asset allocation, taking on the appropriate amount of risk.
- Short-term goals are suited to less volatile assets — bonds, for example.
- Long-term goals are better suited to riskier allocations with potentially greater returns.
- A goal may be to shore up your emergency fund — to have an adequate safety net.
- You may want to pay down debts and loans, pay off a mortgage, or refinance to a better rate. (Keep in mind that you should consider tax benefits from mortgage interest.)
- You want your money to work harder for you, in a diversified portfolio with a higher expected rate of return.
If you want to use your inheritance for a major purchase such as a house, consider what your normal income allows in terms of ongoing monthly expenses.
Don’t forget your retirement accounts, either. Contribute the maximum allowable amount to retirement accounts for the year. The numbers can be small compared to your overall inheritance, but retirement plans come with tax benefits. With an employee-sponsored plan such as a 401(k), you are limited to contributing from your salary, so increase your contributions to the limit.
Put your inheritance to work on your goals, avoid spending it on splurges, and be mindful to maintain your savings habits. Be sure to work with professionals who can guide you in meeting your financial goals every step of the way.
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