Inheritance IQ: Avoid These 7 Costly Mistakes with Your Windfall

Receiving an inheritance can be a life-changing event, bringing with it new opportunities and financial security. Whether it’s a significant sum of money, property, or other assets passed down from a loved one, the responsibility of managing this windfall can feel both exciting and overwhelming. However, amidst the excitement, it’s important to tread carefully. Why? Because the mismanagement of an inheritance can lead to unintended consequences and missed opportunities. In this article, we’ll delve into the complexities of handling an inheritance wisely. We’ll explore the common pitfalls that many individuals encounter and offer practical guidance on how to avoid them.

1. Avoid making impulsive decisions:

It’s natural to feel a rush of excitement upon receiving an inheritance, but allowing emotions to drive financial decisions can lead to costly mistakes. Before making any major financial moves, take a step back and assess the situation. Whether it’s deciding how to invest the inheritance or allocating funds for immediate needs, a thoughtful approach is essential. Making impulsive decisions may result in squandering the inheritance on unnecessary expenses, risky investments, or debt repayment without considering the bigger picture. By taking the time to evaluate your financial situation and objectives, you can make informed choices that align with your long-term goals and aspirations.

2. Don't overlook tax implications:

One of the most common mistakes individuals make when inheriting wealth is failing to consider the tax implications. Ignoring tax obligations can result in unexpected liabilities and diminished inheritance value. Each inheritance may come with its own set of tax considerations, depending on factors such as the type of assets received, the size of the inheritance, and local tax laws. It’s important to familiarize yourself with these tax implications to avoid any surprises down the line. For instance, inheriting certain assets, such as real estate or investment accounts, may trigger capital gains taxes upon sale. However, utilizing tax-efficient strategies, such as spreading out asset sales over time or taking advantage of tax deductions, can help minimize tax liabilities. Additionally, consulting with a tax professional can provide valuable insights into optimizing tax efficiency and preserving your inheritance.

3. Don't neglect to create an emergency fund:

After receiving an inheritance, the first step should be to prioritize the creation of an emergency fund. This fund serves as a crucial financial safety net, providing a buffer against unexpected expenses and financial emergencies. Without such a fund in place, individuals risk facing dire consequences when unforeseen circumstances arise. Whether it’s an unexpected medical bill, car repair, or sudden job loss, lacking sufficient savings can lead to resorting to high-interest debt, liquidating investments prematurely, or even jeopardizing long-term financial goals. By establishing an emergency fund, individuals can safeguard their financial well-being and gain peace of mind knowing they have a cushion to fall back on in times of need.

4. Avoid using the inheritance to pay off low-interest debts:

While it may seem important to eliminate debts, using a windfall like an inheritance to pay off low-interest debts may not be the most optimal use of funds. The primary reason for this is the concept of opportunity cost. By using a portion of your inheritance to pay off low-interest debts, you’re essentially forgoing the potential returns that could be earned by investing those funds elsewhere.

For instance, if you have a low-interest mortgage or student loan, the interest rate may be relatively favorable compared to the potential returns from investing in the stock market or other higher-yield investment opportunities. By using your inheritance to pay off such debts, you’re missing out on the opportunity to generate greater wealth over the long term through investments with higher returns.

Additionally, paying off low-interest debts prematurely may deplete your liquid assets, leaving you with fewer resources to address future financial needs or investment opportunities. Instead, it may be more beneficial to maintain a balanced approach by simultaneously investing a portion of your inheritance while responsibly managing your debts. This way, you can capitalize on the potential for higher returns while still addressing your financial obligations effectively.

5. Avoid keeping all funds in low-yield savings accounts:

Avoiding the temptation to keep all your funds in low-yield savings accounts is essential for maximizing the growth potential of your inheritance. While savings accounts offer a secure place to store money, their low interest rates often fail to keep pace with inflation. Over time, inflation erodes the purchasing power of your savings, meaning that the value of your money decreases in real terms. Therefore, keeping all your funds in a low-yield savings account can effectively result in a loss of wealth over time.

Instead, consider exploring short-term investment options that offer the potential for better returns. Short-term investments, such as certificates of deposit (CDs), money market accounts, or short-term bonds, can provide higher yields compared to traditional savings accounts while still offering a relatively low level of risk. These investment vehicles typically offer higher interest rates or returns than savings accounts, helping to mitigate the impact of inflation on your savings.

6. Don't put all your eggs in one basket:

Not putting all your eggs in one basket is a fundamental principle of sound investing, and it’s particularly relevant when managing an inheritance. Diversification is crucial because it helps spread investment risk across different assets, thereby reducing the impact of any single investment’s performance on your overall portfolio. By diversifying your investments, you can minimize the potential for significant losses while still capturing opportunities for growth.

One reason why diversification is important is that different asset classes tend to perform differently under various market conditions. For example, while stocks may offer the potential for high returns over the long term, they also come with higher volatility and greater risk of short-term losses. On the other hand, bonds typically provide more stable returns but with lower potential for growth.

To achieve diversification, consider allocating your inheritance across a mix of asset classes, such as stocks, bonds, real estate, and alternative investments. Within each asset class, further diversification can be achieved by investing in different sectors, industries, or geographic regions. Additionally, consider diversifying across investment styles, such as growth stocks versus value stocks, or active management versus passive index funds.

Furthermore, diversification extends beyond just asset allocation. It also includes diversifying within each asset class to reduce specific risks associated with individual investments. For example, instead of investing in a single stock, consider building a diversified portfolio of stocks across different industries and market capitalizations. Similarly, within the bond market, diversify by investing in bonds with varying maturities, credit qualities, and issuers.

Ultimately, by implementing a diversified investment strategy, you can potentially reduce overall portfolio risk while still capturing opportunities for long-term growth. Remember that diversification does not guarantee profits or protect against losses in a declining market, but it can help manage risk and improve the likelihood of achieving your investment objectives over time.

7. Don't try to manage the inheritance alone:

Attempting to manage your inheritance alone can be a risky endeavor with potentially significant consequences. While it may be tempting to handle it independently, the complexities involved require expertise that only a professional financial advisor can offer. Partnering with an advisor brings invaluable benefits, including personalized guidance tailored to your unique financial situation and goals. Their expertise and experience can help you develop a comprehensive financial plan, navigate tax considerations, and make informed investment decisions. Moreover, they provide objectivity and discipline, helping you avoid emotional decision-making and behavioral biases that could hinder your financial progress.

Conversely, managing your inheritance alone exposes you to various risks. Without professional input, you may overlook crucial aspects such as tax implications, asset allocation, and risk management. Making uninformed decisions could lead to missed opportunities for growth or even financial setbacks. Overall, while it may seem more convenient to go solo, the benefits of working with a financial advisor far outweigh the risks, ensuring that your inheritance is managed effectively and aligned with your long-term financial objectives.

In conclusion, managing an inheritance is a significant financial responsibility that requires careful consideration and strategic planning. Throughout this article, we’ve highlighted several common mistakes to avoid, including making impulsive decisions, overlooking tax implications, neglecting to create an emergency fund, and attempting to manage the inheritance alone. By recognizing these pitfalls and taking proactive steps to address them, you can maximize the potential of your inheritance and pave the way for long-term financial success.

At Insight, we understand the complexities involved in managing an inheritance, and we’re here to help. Our team of experienced financial advisors can provide personalized guidance tailored to your specific needs and goals. Whether you’re looking to develop a comprehensive financial plan, navigate tax considerations, or optimize your investment strategy, we’re dedicated to helping you make informed decisions that align with your long-term objectives. Don’t navigate the complexities of managing your inheritance alone—reach out to us today for professional guidance and support.

Reviewed by,

Chad Seegers, CRPC®

Chad Seegers, CRPC®

Chad began his career with Sagemark Consulting in 2005 and then became a Select member of Sagemark’s Private Wealth Services which operated as a national resource for financial planners focusing on Advanced Strategies in the High Net Worth marketplace. Chad then began his partnership with Insight Wealth Strategies in 2013 focused on retirement planning primarily with Oil and Gas employees and executives. His primary areas of expertise are retirement, estate, and investment strategies as he serves as Investment Strategist for the financial planning team.

Insight Wealth Strategies, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Insight Wealth Strategies, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Insight Wealth Strategies, LLC unless a client service agreement is in place.

Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.