Take care when managing an inheritance

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on August 17, 2009 at 12:13 PM, updated August 17, 2009 at 12:15 PM

I recently received an inheritance from an aunt. I want to do the right thing and try to take good care of the financial legacy entrusted to me. How should I go about doing that?

Inheriting money is typically a gift from someone close to you that deserves to be cherished and put to good use. If managed well, the benefit to you can far exceed what even the best-intentioned benefactor might have imagined.

If you are like many baby boomers, you either have or are likely to receive some inheritance from parents or others during your life. Even if the amount of money received may not put you on "Easy Street," it can make a difference if you handle the inheritance properly.

A 2006 study by the AARP Public Policy Institute showed that about 20 percent of baby boomer households received an inheritance, and another 15 percent expect to receive one in the future. The median value of those who have received an inheritance was $64,000 (in inflation-adjusted dollars) in 2004. While that may not be enough to drastically alter your life, it certainly is significant enough to make a substantial difference in your financial situation.

Any sum you potentially receive as an inheritance should be helpful to you. The larger the amount, the more decisions you will have to make. Most importantly, make good use of your inheritance, no matter the dollar amount involved, in order to carry out the legacy your benefactor desired.

Here are some steps to consider as you determine what to do with this newfound source of wealth:

* Be realistic about what it means. An inheritance does not give you license to suddenly change your lifestyle (except in those rare cases where your inheritance is a sum of several hundred thousand dollars or more). It might help you handle an emergency need or achieve a longtime goal, however. Be cautious about altering your approach to money just because of a sudden new source of wealth. After all, for most, this is a one-time event that won't be repeated.

* Determine how it fits within your overall financial strategy. Consider the impact of an inheritance and the effect on your financial life. You need to determine if the money you've received will be used for a specific purpose, or incorporated into other existing assets you already established to help achieve certain goals.

* Look into possible tax implications. It is important to discuss your situation with a tax advisor who can help you understand the often intricate and complex laws associated with your inheritance. Some of the questions related to taxation revolve around the specific type of asset you inherit. For instance, if you inherit shares of a stock, the cost basis for the stock will not be its original purchase price, but valued at the price on the day the decedent died. This may provide a tax advantage for you at the time you sell the shares. If you inherit retirement plan assets, such as an individual's workplace savings plan or an IRA, there are different tax laws that will apply. To make the most of your inheritance, it is vital that you comply with appropriate tax laws to avoid any penalties.

* Develop your own estate plan. The receipt of an inheritance is a good reminder that all of us have a need to prepare for the disposition of our estates at death. If you don't have a will or haven't updated one lately, be sure to do so. Also, review the beneficiaries you have named for your retirement plans (workplace plans as well as IRAs) to be sure they are current.

If you plan how to manage your inheritance, it may have a more significant impact on your overall financial situation. Even if you decide to use the money for an immediate purpose, you want to make sure that your strategy is consistent with your entire financial approach.

Enlisting the help of professionals to guide you along the way, including an attorney, accountant and a financial advisor, can help you best manage this once-in-a-lifetime opportunity.
