Managing an Inheritance or Windfall

Over the next 50 years, it is expected that $41 trillion to $136 trillion in wealth will be passed down, according to CBS Marketwatch.

Whether it is an inheritance, retirement plan payout, proceeds from the sale of a business or an insurance settlement, financial planning is important for anyone expecting a windfall. It may happen once in a lifetime, if at all. But when it does, it can change your life in ways you never even imagined.

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If you are expecting to come into a lump some of money, it's best to be prepared and consider the following recommendations.

Cover the tax liability first - Before you plan your investing strategies, take care of any income or estate tax liability you may face as a result of inheritance or the sale of property. You should meet with your qualified tax advisor and your financial advisor to determine any tax implications that may occur.

For instance, generally the IRS says that property received as a gift, bequest or inheritance is not included in your income.

However, if that property produces income, such as interest, dividends or rental payments, you'll have to pay a tax on that amount. Also, you may decide to sell the property received as a gift or inheritance. The calculation of the gain or loss on the sale of gift or inheritances is subject to complex tax rules and should be done with the help of a qualified tax advisor.

There are different rules and tax consequences awaiting those who inherit an IRA qualified plan or annuity contract. Distributions from these accounts are generally taxed to the person taking the distribution. Spouse and non-spouse beneficiaries have many choices and decisions to make and each comes with a different tax consequence, benefit and trade-off.

Keep new expenses to a minimum - After inheriting a substantial sum, it may be tempting to buy that home, car or vacation for which you have longed. While you may be able to pay the upfront fees, be careful about raising up your lifestyle to a level that is not sustainable for the long term.

If you inherit cash, put the money in a money market or short-term certificate of deposit, an account that is liquid, until you have a clear financial plan for the money.

Put out fires - If you have serious financial issues, such as excessive credit card or other debt, little in emergency savings, a lack of life or disability insurance, now is the time to take care of these personal finance essentials. Sudden wealth is a golden opportunity to clean up some important financial issues before you seed other goals such as education savings or retirement planning.

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Consider a jump-start to education or retirement savings - Next, if your debt is managed, your emergency reserves replenished and you are adequately insured, consider making a contribution to a 529 College Savings Plan if you have children or grandchildren. The 529 Plan is an excellent tool to consider investing a one-time amount for education.

While there are annual limits to most tax-deferred retirement plans, consider maximizing your contributions to tax-deferred retirement plans if you receive a windfall. You should then consider adding suitable securities to taxable accounts to get the additional cash working for you.

Review your financial goals - Sudden wealth may come with tax bills, legal responsibilities and many money management issues. Assemble a team of experts – an accountant, a qualified financial advisor and a lawyer. Make sure you have the five basic legal documents – a durable power of attorney, a will, a revocable trust, a living will and a health-care proxy in place.

Before you make any decisions regarding how to spend your windfall, work with a qualified financial advisor to review your family's short and long term goals. A windfall can change your risk tolerance and investing time horizon and you may need to redefine your investment strategies to account for these changes. Finally, consider a variety of scenarios outlining how the money could provide the most progress toward reaching some or all of your goals.

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