While receiving an inheritance may lead to obvious mixed emotions, the potential financial ramifications can have effects for generations to come. Over the next 45 years, economists expect over $40 trillion to be passed from one generation to another.

Many clients who receive an inheritance simply sock the money in a savings account, or even worse, simply do nothing! While an inheritance presents many positive opportunities for planning, it also presents some potential pitfalls. What should you do if you inherit money?

Start by asking yourself- or your financial advisor- these questions:

• How quickly should I decide what to do with the money?
• What are the tax consequences?
• What should I do with the retirement plans, real estate, stocks and other investments that are part of the inheritance?
• How will inflation affect my inheritance over time?
• How should I invest my inheritance to achieve my short- and long-term goals?

Receiving Your Inheritance
After the passing of a loved one, it may take several months for the estate to be settled. Once you receive the inheritance, it is important not to make impulsive decisions. If you receive cash, consider putting the money in a money market account or short-term certificates of deposit (CD). This will allow you to earn interest while considering your long-term plan. If you inherit stocks or other securities, you should consider consulting a tax or financial advisor before deciding your next move.

Spend or Invest?
It may be tempting to spend your inheritance on luxury items such as vacations, new cars or vacation homes. Before going on a spending spree consider taking a look at your current financial situation. If you have debt- especially high interest debt such as credit cards – it may make sense to first pay that off. Next, examine your retirement plans and/or college savings. If you are not at the level that you should be, these would good areas to supplement.

What About Inherited Stocks?
These may present an excellent planning opportunity. Often clients inherit stock or other securities that the decedent had owned for many years. In many cases, they were never sold because the capital gains taxes would have been too high.  When you inherit securities, they get a stepped-up cost basis; that is, when you sell them, you only pay taxes on the difference in value from the date the decedent passed away until the date you sell them.

Managing Inherited IRAs
When you inherit a retirement plan, there are several options for distribution.  Generally the worst choice is to take the entire balance in cash as this would make the whole amount taxable to you all at one time. The best idea may be to consider how to defer the taxes as long as possible, thus allowing the investments to continue to grow. The choices can be complicated and confusing, so consult a tax or financial advisor before selecting a distribution option.

In conclusion, receiving an inheritance can be a wonderful opportunity as well as a lasting memory of a loved one. You should take care to ensure that the inheritance is managed in such a way to maximize your financial objectives and help realize your own dreams.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore. For professional advice, contact a Certified Financial Advisor.