Receiving an Inheritance or Financial Windfall: Why a Plan Matters
Featuring Tina Mistry, CFP® and AJ Flores, CFP®
Receiving an inheritance, settlement, business payout, or other financial windfall can be a life-changing event. While it may create new opportunities, it can also bring important financial decisions that deserve careful consideration.
In a recent ABC30 Watching Your Wallet segment, Tina Mistry, CFP®, CEO and Senior Financial Advisor, and AJ Flores, CFP®, Lead Financial Advisor at Portfolio Advisors Inc., discussed why taking a thoughtful approach can help individuals make the most of a financial windfall while avoiding costly mistakes.
Not All Inheritances Are Taxed the Same
One of the biggest misconceptions surrounding inheritances is that all inherited assets are treated equally.
“Depending on how you inherit the money, the type of account vehicle that it’s inherited, the form in which it’s inherited can create taxes,” Tina explained.
Inherited assets can come in many forms, including:
- Retirement accounts
- 401(k)s
- Life insurance proceeds
- Investment accounts
- Business interests
- Mineral rights
- Other inherited property
Each asset type may carry its own rules, tax implications, and distribution requirements.
Understanding those differences before taking action can help prevent unintended tax consequences.
Pause Before Making Major Decisions
A sudden increase in wealth often comes with excitement, but it can also create pressure to make immediate financial decisions.
“There can be a tendency to see this large pile of money and feel like you want to make these big purchases without setting enough aside to make sure taxes are paid,” AJ shared.
Whether it’s purchasing a new home, upgrading vehicles, taking a dream vacation, or making large gifts, slowing down and evaluating the bigger picture can be incredibly valuable.
Giving yourself time to understand the assets you’ve received and develop a plan can help ensure decisions align with your long-term goals.
Understand the Tax Consequences
According to Tina, one of the first steps should be understanding what you’ve inherited and how distributions may affect your financial situation.
“Being careful, understanding and knowing the type of account that you’re inheriting and understanding the tax consequences of when you take that money out or when to postpone taking that money out,” Tina advised.
In some cases, withdrawing funds too quickly may result in unnecessary taxes. In others, there may be specific deadlines or distribution requirements that need to be considered.
Seeking professional guidance can help clarify available options and identify potential planning opportunities.
Pay Down High-Interest Debt
A financial windfall can also create an opportunity to improve your overall financial picture.
AJ encourages individuals to evaluate existing debt and identify which obligations may be costing the most.
“Categorize the different levels of debt you have, which are the most expensive to carry,” AJ said. “Paying those down could be a really good idea.”
Reducing high-interest debt can improve cash flow, lower financial stress, and create more flexibility moving forward.
Invest With the Future in Mind
While it can be tempting to focus on immediate spending, a portion of an inheritance or windfall may also help strengthen long-term financial goals.
“You can also kick-start your investment savings,” AJ noted.
Investing can help individuals:
- Build long-term wealth
- Support retirement goals
- Create future income opportunities
- Combat the effects of inflation over time
“We know that inflation exists,” AJ explained. “We want to combat inflation in the long term, and investments are a powerful way to do that.”
Consider Strengthening Your Savings
A financial windfall can also provide an opportunity to improve overall financial security.
Depending on your situation, you may consider:
- Increasing emergency savings
- Funding future education expenses
- Maximizing retirement contributions
- Building reserves for major life goals
These decisions can help transform a one-time event into a long-term financial advantage.
Turning Opportunity Into Long-Term Impact
Receiving an inheritance or financial windfall often comes during a significant life transition. While every situation is unique, having a thoughtful plan can help ensure those assets support your goals both today and in the future.
Rather than focusing solely on what the money can buy, it can be helpful to consider what the money can accomplish over the long term.
At Portfolio Advisors Inc., we believe that thoughtful planning can help turn a financial windfall into a meaningful opportunity for lasting financial confidence.
If you’ve recently received an inheritance or expect to in the future, Tina Mistry, CFP®, AJ Flores, CFP®, and the team at Portfolio Advisors Inc. are here to help you evaluate your options and build a plan that aligns with your goals.
