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What To Do With an Inheritance
Depending on its worth, receiving an inheritance can be a life-changing event and it's important to be thoughtful and strategic in your approach to managing and investing your inheritance. In addition to the important decision to reach out to a financial advisor or a financial planner, here are some basic steps you should consider.
Research and Assess the Value of the Inheritance
Prior to any decision on the inheritance, it's important to understand what you've received, how it's titled, and any restrictions and complications that come with it.
For example, though an inheritance is not considered an income and, therefore, does not come with income taxes, there are exceptions that could make some of the assets incur inheritance taxes. You may need to pay taxes such as federal inheritance tax, estate taxes or property taxes.
Gathering the right information and critically reflecting on your inheritance assets and options is crucial to making informed decisions about how to manage and invest your assets.
Develop a Strategy to Your Spending
It's natural and okay to indulge in some luxuries after receiving an inheritance, but only a little. It is important to mind your spending and to not blow through your inheritance.
Consult with Professionals
Losing a loved one is an emotionally charged event. Spending wisely is easier said than done, especially in the wake of such an event. You need professionals from financial advisors to attorneys to help you sail safely through such seasons.
Consulting with any or all of these professionals, especially a financial advisor such as Bay Street Capital Holdings' William Huston, to help you understand the financial and tax implications of your inheritance and to help you create an asset management plan is the wisest decision you will make.
Create a Plan
Based on your goals, values, and the advice of professionals, create a plan for managing and investing your inheritance. This plan should include a budget, a plan for paying off any debts, and a plan for investing and saving for the future.
Consider Charitable Giving
Depending on the amount of assets and cash you have inherited, an inheritance presents you with an opportunity to make significant contributions to the lives of others through philanthropy.
Review and Update Your Estate Plan
Review your will, trust, and other estate planning documents to ensure that they align with your current intentions and that your inheritance is distributed according to your plan.
How to Invest an Inheritance
In line with the instruction to create a plan, a key step that must lead the way in your managing and investing plan is investing—you should care about your future and invest in it.
Investing an inheritance can be a great way to grow your wealth and secure your financial future. Here are some steps you may want to consider when investing your inheritance:
Review and rebalance your portfolio: Regularly review and rebalance your portfolio to ensure that it remains aligned with your goals and risk tolerance.
Take a long-term approach: Investing is a long-term strategy and it's important to have a long-term perspective when investing your inheritance.
Invest in what you know: It's important to do your own research and invest in what you know.
Invest in a diverse range of assets: Investing in various assets does not mean investing in securities in which you have no knowledge. As with the previous instruction, you should research each investment option you consider.
Don't be lazy about researching—it shouldn't stop you from diversifying your portfolio.
Consider investing in a diverse range of assets, such as stocks, bonds, real estate, and alternative investments. This will help mitigate risks in general and increase your chances of reaching your financial goals.
Here are a number of ways you should consider investing:
One of the best things you can do with your inheritance is to invest it in your retirement. You can do this by stocking up to the very limit of your tax-advantaged retirement account, a 401(k) or traditional IRA, including catch-up contributions if you have crossed 50 years of age.
Invest in mutual funds with good growth stocks via personal or joint taxable brokerage accounts. These accounts have neither tax advantages nor contribution limits, and they come with a penalty-free option of taking money out at any point—a big plus!
Moreover, mutual funds are useful for investing in a broad array of securities including bonds and stocks. And it puts your funds into the hands of experts who invest in a number of companies and industries and ensure to reduce risks.
As we have said, you too should know something about the sectors your investments are going into. Don't leave it to those experts. Interact with them and learn as much as you can.
Bonds offer you safe investment options with guaranteed returns, although quite low in relation to other securities. But they are good ways to save for the future and cushion the effects of your other volatile investments.
An index fund could be either a mutual fund or an exchange-traded fund. It tracks a specific sector of the economy with an aim to provide broad returns.
Stocks have both high potential for growth and a high potential for loss which makes them volatile investments.
Whatever the companies you invest in, these types of investments should take up a rather small portion of your portfolio, with more stable investments such as retirement funds and bonds having larger shares. A 5-95 rule for volatile-stable securities is a good rule to observe.
Like mutual funds, exchange-traded funds (ETFs) allow you to diversify your investment across a wide range of stock pools, with higher returns over long periods. But ETFs are more liquid funds.
Real Estate (Cash Payment)
If your inheritance includes a large sum of cash, you can purchase rental properties that you make a one-time payment for. This option may not be suitable for you if your inheritance does not include such a large amount of cash and you have to borrow to complete house payments. It's best if you look for other investment options.
Also, you should work with a professional such as Ila Corcoran when seeking to purchase properties.
Real Estate Investment Trusts
Rather than get your hands dirty, you can work with real estate investment trusts (REITs). They allow you to invest in commercial real estate companies that take a portion of your profit.
In terms of investments and securities, cryptocurrency is a new kid on the block with a very unpredictable future. Moreover, it is highly volatile, which means that it should constitute only a small section of your portfolio.
Keep in mind that a self-managed portfolio of personally chosen assets and securities could be a ticking time bomb. Moreover, investing quickly gets dangerous once you are up in the air. If you haven't done this before, don't attempt to fly solo with your inheritance. Work with a financial advisor or investment professional such as Bay Street Capital Holdings' William Huston to pick out the best assets.
What to Do with Cash Inheritance
Here are some first steps you may want to consider after receiving an inheritance comes with a large cash prize:
Create an emergency fund: Depending on your situation, creating an emergency fund may be the first best thing to do after receiving an inheritance.
Stash into a bank account: similar to creating an emergency fund, you can consider stashing cash inheritance into a high-yield bank account.
Take care of immediate expenses: If you have any immediate expenses that need to be taken care of, such as paying off debts, make sure to address them first.
Invest in yourself or your education: Consider using a portion of your inheritance to invest in yourself, such as furthering your education or starting a business.
Be aware of tax implications: Keep in mind that inheritance is not taxed in the US, but there may be taxes due on certain assets or if you decide to sell them.
Share the wealth: Consider sharing your inheritance with loved ones or charitable organizations.
Take note: your situation is unique from any other's. Copying a friend's process which turned out great for them may prove counterproductive for you. Consult with professionals and make sure to create a plan that aligns with your values and goals for the future.
What to Do with Inherited Luxuries and Similar Assets
Just like a cash inheritance, cars, antiques, jewelries and other luxury assets can be either a boon, burden, or both. Inheriting these and transferring ownership can be a complex challenge.
Here are some steps you may want to consider:
Review your insurance coverage: review your existing insurance coverage to ensure that the assets are adequately covered. You may need to purchase additional insurance to protect the assets.
Decide what to do with the assets: Decide what you want to do with the assets. You may want to keep them, sell them, or donate them to a charitable organization.
Consider the tax implications: Consider the tax implications of the assets. For example, if you decide to sell an asset, you may be subject to capital gains tax.
Take care of the legalities: If you inherited a car, you will need to transfer the title to your name. If you inherited other items, you will need to review the will and other estate planning documents to ensure that you are in compliance with the terms of the inheritance.
It's also important to be mindful of the sentimental value that these items may have and to act in ways that honor the memory of the person who left them to you. And always remember to work with professionals, either a financial advisor or a financial planner.
Bay Street Capital Holdings
Bay Street Capital Holdings is a Black-owned, independent investment advisory, wealth management, and financial planning firm headquartered in Palo Alto, CA. They manage portfolios with the goal of maintaining and increasing total assets and income with a high priority on managing total risk and volatility. Although many advisors may focus on maximizing returns, they place a higher priority on managing total risk and volatility.
Our founder, William Huston founded Bay Street after 13 years of supporting the United States' largest retirement plan ($650B) Thrift Savings Plan. He is recognized as Investopedia’s Top 100 Financial Advisors for 2022. In California, Bay Street Capital Holdings is the only Black-owned firm out of the twenty firms that received this recognition.
In Scottsdale Arizona, Ekenna Anya-Gafu CFP, AAMS is recognized among the Best Financial Advisors for his responsiveness, friendliness, helpfulness, and detail. Bay Street was founded to advocate for diverse and emerging fund managers and entrepreneurs.
In 2021, Bay Street was selected as a finalist out of over 900 firms across the US in the category of Asset Manager for Corporate Social Responsibility (CSR).