If you inherit a portfolio or a large amount of money, proceed with caution, according to "What to Do When You Get an Inheritance," in US News & World Report. Every situation is different, but a few basics need to be kept in mind for heirs who are thinking about investing their inheritance in stocks, bonds, hedge funds or any other investment vehicles.
First, get good information and assistance from an expert: speak with an experienced estate planning attorney, preferably the one who worked with those giving the inheritance. Heirs should find a CERTIFIED FINANCIAL PLANNER™ practitioner who works for a registered investment advisor with a fiduciary duty to their clients. Typically, they aren't commissioned salespeople, and have a legal duty to keep your best interests in mind.
Often, an inheritance can be administered via a trust. However, it needs to be funded properly due to tax ramifications, expenses and other legalities. Talking with your estate planning attorney to ensure the trust is properly funded is critical. For heirs in their 50s or 60s who inherit a portfolio from octogenarian parents, they should assess the portfolio's appropriateness. Then it becomes a “basic” financial planning exercise based on an heir's risk profile, financial goals, tax bracket and retirement target.
Paying off debt and starting to save before thinking about investing in the stock market is often a good idea as well. There's no investment one can make, short of taking on substantial risk, which will earn as much as the 16% some may be paying on credit card debt. After paying off credit card debt, look at other debt, especially high-interest college loans. Paying off loans is like earning a risk-free rate equal to the interest rate on the loan. You can also pay down a mortgage, although many people have already taken advantage of historically low interest rates and refinanced.
Next, establish good savings practices. Depending on job security, keeping an emergency fund of three to six months of living expenses in a savings account, certificate of deposit, or short-term Treasury bills is often wise. Also, use an inheritance to maximize, increase, or start retirement savings through an employer-sponsored retirement plan—such as a 401(k)—or through an IRA.
Working with a financial professional when receiving an inheritance is crucial. So much so, that Family Estate Planning Law Group has built this into our process. We work with your trusted financial professionals to ensure all assets are aligned with your estate plan, which helps avoid the problem of unfunded or incorrectly funded trusts mentioned in the article. We also encourage our clients to have a Family Care Meeting™, which explains the estate plan and often includes the trusted financial professionals. This allows your heir to meet and get to know your trusted professionals which may minimize unintended tax ramifications or other expenses for the heirs.
Reference: US News & World Report (November 5, 2015) "What to Do When You Get an Inheritance"