Making the most of an Inheritance
By Chelsea Traver
When you receive a significant inheritance, it is often with mixed emotions. Aside from grief, there is often a feeling of responsibility to do right by this money; potentially guilt for not having earned it; and a desire to make sure it isn’t wasted.
Each person is different and will process these emotions in their own way. However, there are some key areas to consider to make the most of your inheritance: for you, your family and potentially the world at large.
1. Take your time, then take action
When you receive a significant inheritance, it can feel overwhelming to consider all of the possibilities. You don’t have to decide your future all at once and it can be helpful to take a bit of time to reconcile yourself to the windfall.
Wait to make life-changing decisions (such as quitting a job) as you process your grief and consider what you want your life to look like. This will ensure you don’t rush into making decisions that you might regret.
Equally, it’s important to not delay making decisions indefinitely. It can be easy to put it in the too-hard bucket but having a plan and taking active ownership of the funds can give you peace of mind that you are doing right by the person who gave them to you.
2. Splurge a little
Depending on the inheritance amount, you can absolutely use a portion of the funds for initial enjoyment. Be clear with how much you want to put towards this as it can also be easy to get carried away and later regret not using the funds for longer-term goals.
3. Put cash in a high-interest account
Have a high-interest bank account set up so when the money arrives it can immediately begin to earn interest while you are making decisions. It might be worth opening an account at another bank to make the most of the current high-interest rates. Initially, ensure the funds are kept liquid (rather than locked up in long-term dated deposits) while you decide what you want to do with your funds.
This might seem like something that can wait but if you receive a large inheritance, you could be earning thousands of dollars a month while you decide what you want to do with the funds. But be sure to look at the fine print, some providers only give the full interest rewards up to a certain amount.
It is recommended that this account be in your own name (rather than a joint account) as an inheritance is one of the exceptions to the usual relationship property rules. We provide more information on relationship property below.
4. Pay off high-interest debt & set up an emergency fund
If you have any high-interest debt, such as a credit card or car loan, pay this off first. Then decide how much money to keep as an emergency fund. We generally recommend 3 to 6 months' worth of expenses.
5. Consider your future & what you want to do
You have received these assets and want to make sure that you use them wisely…but you aren’t sure what your future will look like.
This will likely evolve and there are options available to ensure you get the funds working for you now while having flexibility for the future.
Consider what your dream future might be. It might involve:
- Paying off your mortgage
- Starting a business
- Buying a bach that you can also rent out
- Paying for your children’s education and supporting them with a first-home deposit
- Structuring a charitable giving strategy
- Taking time off to travel
- Reducing or stopping work
By taking the time to think critically about what you want from your life you can develop a framework of goals to work towards and help you decide what to do with the funds.
6. Pay yourself first
Ensure that you look after yourself first. When receiving a major inheritance, it can be easy to want to gift a large portion to your children. Perhaps you want to ensure this wealth benefits all members of the family. Or you feel that this is what the person who gave you the inheritance would have wanted.
However, if you haven’t confirmed that you have enough for a secure financial future then you will be putting yourself on the back foot. Your child can get student loans or build a house deposit. You can’t go back in time and earn more.
7. Review what you inherited
The type of assets you inherit will help inform you what your next steps are. Consider that they are meant to benefit you and should be set up in a way to support the life you want to live.
What to do with inherited Cash?
When you inherit cash the first thing to do is put it in a high-earning interest account. As mentioned above you can see what cash options are available.
What to do with inherited House?
If you inherit a house you have three options:
- Keep it and live in it (either full-time or part-time)
- Keep it and rent it out
- Sell it
What to do with inherited Investments?
When you receive an inheritance of (diversified) investments it can often be overwhelming, especially if you don’t have a financial background. There might also be a personal attachment to these investments as they were chosen by your family member.
Due to these factors, it can be easy to just leave these assets as they are and hope for the best. However, they might not be aligned with your personal risk level and investment timeline. By taking ownership of the investment process (either by yourself or with the help of a financial adviser) you can align your investment strategy with your situation.
8. Decide how to manage your funds going forward
It might feel easy to stick with the strategy that your family member had, however, consider what YOU want from your investments. For people who have inherited a significant amount of money, there are three common wealth-generating options:
- Investment in financial markets – a mix of shares and bonds depending on goals
- Invest in property – either through a property company or directly
- Private Investments - This could be investing in a business you start, other private businesses, or in companies/funds that have the potential to positively impact the world (Impact Investments).
You may want to keep it simple and just invest in investment markets. Or you might want to use your money to support impact opportunities. No matter what you choose you want to make sure you have a plan that can evolve with you as your life changes.
Working with an adviser
If you decide to work with an investment advisor, you may be tempted to keep the one currently managing the funds. Perhaps you have dealt with the person through the probate process and find them to be a nice person to deal with. Take this opportunity to consider what you would want in an ideal adviser. While the one you are currently dealing with might be a good person, you want someone who is the best fit going forward.
For more information on how to pick an adviser this Mary Holmes article is a good place to start. Additionally, consider:
- Can they provide investment options that suit you?
- Does the adviser understand you and your situation?
- Do you feel comfortable with them?
9. Do you want to use your inheritance for good?
Some people who have received an inheritance might want to support their financial goals and also use the funds to benefit the world at large. You can do this either by investing ethically or giving to charities.
Investors tell us time and again how energizing and rewarding this can be. It can be a way to create a legacy with the funds, to honour the person who gave you the inheritance.
Ethical Investing
When receiving an inheritance one thing to consider is what do you want to invest in. Do you want a focus on ethical investments in your strategy? Do you want to specifically invest in companies that are working towards solutions to social or environmental problems?
For larger investors, they can also consider private impact investments. This type of investment involves investing in startup or mid-sized companies that have a focus on positively impacting the world. Examples of this include social housing and clean energy. These investments might go on to have a significant impact on the world at large and you will be with them on this journey.
Charitable giving
Additionally, this might be the time to create a more structured charitable giving strategy. Consider what causes are important to you and how you would want to support them, either with your time or money. It can be daunting to decide where to start and how to find the right organizations to support. If you want help deciding how to give effectively you can reach out to someone like The Gift Trust. They help donors simplify and amplify their giving by creating an individualised giving plan.
10. Consider contracting out agreement or a Trust.
The general rule in New Zealand is that once a couple is married the relationship property law comes into effect under the Property (Relationships) Act 1976. This means in the event of a separation all ‘relationship property’ is to be divided equally.
The main exception to the relationship property rules is if you receive the funds through an inheritance or gift. However, these will become relationship property if they are intermingled, used for a common purpose, or if the assets are placed in joint names. So for example, if you bought a property and you both lived in it, the property would then be considered relationship property as it was used for a common purpose.
If you want to keep the funds separate a contracting out agreement sets a ringfence around the inheritance.
You could also consider setting up a trust. Trusts are a nuanced area and don’t make sense for everyone but they can provide asset protection. Here is more information on Trusts.
11. Get help if needed
You may look at this list and be overwhelmed or wonder what your next step should be. That’s where you can get help. Depending on the level of inheritance it might make sense to have a few professionals helping you
- Investment adviser: they can be your financial partner to guide you through making these decisions as well as managing the investments on an ongoing basis.
- Lawyer: For contracting out or trust
- Accountant: If your financial situation has become more complicated, you might benefit from using an accountant.
Inheritance Checklist
- Take your time, then take action
- Splurge a little
- Put cash in a high-interest account
- Pay off high-interest debt & set up an emergency fund
- Consider your future and what you want to do
- Review what you inherited
- Decide how to manage your funds going forward
- Consider a contracting out agreement or trust
- Get help if needed
