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Tips for Navigating Your Inheritance

How to Make the Most of Your Loved One’s Gift

Being left an inheritance can be a life-changing event. It can also be incredibly difficult to navigate the transition of receiving an inheritance while you’re simultaneously dealing with the complex emotions that come with losing a loved one. While at first glance it may seem like a positive change, an inheritance can often feel burdensome or stressful, too. Below, we’ll review several steps you can take to help understand what you’ve inherited and ensure you’re making the most of the gift your loved one left behind.

Step 1: Gain Clarity on What You Inherited

There are various types of assets that you can inherit and each one comes with a unique set of tax liabilities and responsibilities, so it’s important that you evaluate exactly what was left behind and what that means for you personally. Here are some things to keep in mind:

  • If you’ve inherited a loved one’s home, it’s common to want to sell the home right away. Just keep in mind that the cost basis of the property is stepped up to a “Date of Death Valuation.” So, unless you sold the home for a price that’s higher than this valuation, you shouldn’t find yourself subject to any taxes.
  • Homes aren’t the only asset that comes with A step-up in valuation. Accounts like brokerage accounts can too, so you need to understand what stocks, bonds, ETFs, and mutual funds are in this account and how they may relate to your personal financial planning needs. In doing so, you’ll be able to ensure that you’re making a timely sale of assets while the step-up is fresh.
  • If your inheritance includes any retirement accounts, chances are each one has different rules regarding their distributions and whether you’re considered a spouse or a non-spouse, so you’ll need to do some research to ensure that you’re making the most of this gift.

In essence, no two inheritances are the same. It’s important to be fully aware of what you’ve inherited and how it plays into your larger financial plans.

Step 2: Review Your Financials Post-Inheritance

Because of the connection to your loved one, inheritance is likely meaningful to you on a personal level. It’s also meaningful from a financial standpoint because of the capital it adds to your balance sheet. So, you’ll want to take some time and get a big-picture understanding of how your inherited assets will work with your existing assets.

Oftentimes, when people receive a large inheritance their first instinct is to pay off their mortgage or any other large debts they may have. While that’s not necessarily a bad move, don’t make it too quickly. You’ll want to be sure that you’re taking some time to think through exactly what the right step is for you. For instance, if your mortgage has a reasonable interest rate, paying it off when you already have the means to satisfy your monthly payment may not be the savviest choice for you. Instead, investing your inheritance might be the better option.

This is why it’s important to carefully and intentionally review all aspects of your finances before choosing how to use your inheritance. Each person’s financial needs and goals are unique, and you’ll want to develop a personalized strategy that will serve you long-term.

Step 3: Revaluate Your Investment Strategy

As is the case any time you come into more money, receiving an inheritance is an event that should trigger a revaluation of your investment strategy. That means looking at any IRAs, brokerage accounts, and real estate that you own to see where, if at all, changes need to be made. Chances have you previously strategized time horizons on some of these investments based on your needs at the time, and now it may make sense to adjust some of those timelines accordingly.

If you inherited a home, consider:

  • Using the proceeds from selling the home to boost your investment accounts.
  • Transitioning the home into a rental property and using that additional cash flow to cover your current living expenses or to build out your savings.
  • Explore a strategy where you cash out some of the equity in the home and invest the lump sum of cash you receive. You can then rent out the home to satisfy your mortgage and even make a little profit on the side.

Take the time to consider all your options before taking action, and consult a financial professional if you feel unsure about the best move for you. Whatever you decide, you’ll want to be sure that you’re choosing the options that will bring you closer to achieving your long-term goals.

Step 4: Reassess Your Financial Plan

No matter where you were on your financial planning journey before your inheritance, now is the time to reassess your plans and get a new, comprehensive strategy in place. If handled smartly, your inheritance could completely change the course of your life. It can cause you to rethink your goals or, in some cases, provide you with opportunities that weren’t available to you before. Perhaps you’ll be able to retire earlier or support your children and grandchildren in ways you previously couldn’t. Maybe you can finally go on that trip you’ve been dreaming of, or leave behind a lackluster job and finally start the business you’ve been dreaming of.

Regardless of what your goals are or how they may change, taking the time to build out a comprehensive financial strategy and fully understanding the financial implications of your choices is crucial in ensuring you don’t waste any opportunities provided by your inheritance.

Step 5: Don’t Be Afraid to Ask for Help in Navigating Your Inheritance

Receiving an inheritance can be life-changing, yes. It can also be stressful and overwhelming, especially as you deal with the grief of losing a loved one. You’ll want to be sure that you’re taking the necessary steps to make the most of the gift left behind so that you don’t risk mismanaging it or losing out on opportunities. If you’re not careful, excessive spending and taxes can significantly erode your inheritance, and this catches many heirs by surprise.

At Arbor Capital, we can help you make the most of your inheritance through personalized guidance and wealth management solutions that serve your unique situation and financial goals. Contact us today to learn more about the services we offer and whether we might be the right partner for you.

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