How to Handle a Windfall Inheritance

A windfall inheritance from your loved one is a life-changing event. It could have a positive impact on your family and personal finance. When you get a windfall inheritance, you shouldn't feel guilty about gaining money at the death of someone you loved. After all, it’s what they’d have wanted.

On average, Australians pass an inheritance of AUD$561,636 (USD$501,919) according to the Hongkong and Shanghai Banking Corporation (HSBC) global future retirement report. The Australian inheritance is 4 times higher than the global average of USD$148,205.

However, inheritance comes with obligations. Below are a few tips on how you can handle your inheritance:

1. Take a deep breath
2. Understand the inheritance
3. Seek advice
4. Decide what you want to do
5. Keep your day job
6. Plan your legacy

Take a deep breath

Inheritance is a complicated package that combines family, money and death. Intense emotions accompany windfall inheritances you've earned from a personal loss, and grief can quickly impact your decisions on your new assets. Hence, you should take a moment to pause and breathe before making hasty decisions that may look like a good idea at the moment but that you'll regret later.

Don't feel pressured to make decisions. Instead, take time to understand your inheritance, options and new responsibilities.

Understand the inheritance

Generally, a windfall inheritance will fall into one of three categories:

• A direct inheritance: This is where you inherit assets directly, such as a car, securities or life insurance proceeds. For this, you need to understand the probate process, which takes many months up to a year before everything is fully transferred to your name.
• A retirement account: You can get a windfall inheritance if your parents had a retirement account. For this type of account, there’ll likely be some taxes you should pay to the Australian Taxation Office.
• A trust: This is an entity holding title to assets on behalf of a beneficiary. You need to understand that this is a legal entity, and the original owner of the assets creates the trust instrument. The trustee appointed by the deceased is responsible for distributing the assets and income.

The first thing you should do once you get a windfall inheritance is pay off the high-interest debts of the person, including other taxes.

Seek advice

A windfall inheritance is always a large sum of money, and you may need the help of a professional in making financial decisions. A financial planner can help you in the following ways:

• Arrange and plan your inheritance
• Set your goals
• Be a source of commitment and motivation to invest
• Provide a decision-making or action plan
• Visualise the benefits and cost of a financial decision
• Improve the plans you already have

If you're getting help, you should know what to expect from your financial advisor. Also, they'll be handling your money, so you need to pick the right financial advisor by doing background checks and in-depth interviews.

Decide what you want to do

After you've gathered your team and understood your inheritance well, it's time to think about what you want to do. We don’t recommend wasting years doing nothing with the money because of the fear of doing something wrong. Although a windfall inheritance could change your family dynamics, you need to move on and do something with it to generate income for years.

The following are things you could do with the inheritance:

• Pay taxes: There aren't any inheritance taxes in Australia, but some situations may require a capital gains tax (CGT). Pay them up.
• Pay off debts: A financial windfall can quickly fix your debt problems. At the same time, it’s worthwhile learning how to spend much less and get your budget under control.
• Invest the rest wisely: Just because you have a lump sum of money doesn't mean you should squander your investments. Follow the basic investment rules and maximise your financial opportunity.
• Refinance your mortgage: Paying off your mortgage shouldn't be a priority, but refinancing it should be. It locks in a lower interest rate, and you can save thousands of dollars.

Keep your day job

When you land a windfall inheritance, it's very tempting to quit that 9 to 5 job. However, keeping your job is a clever tactic to preserve your windfall. Apart from that, the following are more reasons you shouldn't quit your job:

• You could easily underestimate the amount of money that can take the place of your income. According to Forbes, indefinitely replacing an AUD$74,205 annual income will require nearly AUD$2.5 million.
• Quitting your job stops your superannuation contributions.

However, if your current work environment isn't a great contributor to your finances or your sense of joy and purpose, then you might choose to take a breather before deciding the next steps of your career.

Plan your legacy

The financial choices you make today impact your future. This includes when you can retire. A great way to handle your windfall inheritance is through investing for retirement in the following ways:

• Calculating how much you need for retirement
• Living below or within your means
• Finding cheaper but quality ways to plan for your kid's future
• Have realistic financial goals for your retirement
• Reduce your debts
• Re-evaluate your insurance

Remember, it's never too early to begin your retirement investment; the sooner, the better. According to Business Insider, 70% of Gen Z, 82% of millennials, and 84% of Gen X between 18 and 23 years already have retirement savings.

Wrap Up

A windfall inheritance demands a more significant commitment from you. Remember, it's someone else's life's work. So, before spending it, you need to understand your duties. Use it for a good cause and to better your life. Ultimately, you want to make your loved one proud to have chosen you as the custodian and perpetuator of family wealth. And finally, don’t forget to update your Will so that you may be able to give a windfall inheritance to the next generation.