The Top 5 Inheritance Mistakes You'll Want to Avoid, Says a Financial Planner

Locate a Competent Financial Adviser

Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three fiduciary financial advisors that serve your area in minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. Start your search now.

The offers and details on this page may have updated or changed since the time of publication. See our article on Business Insider for current information.

Paid promotion for non-clients: The affiliate links featured here come from partner entities that provide compensation (refer to our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate investing products to create impartial product reviews.

• Studies indicate that typically an individual exhausts their inheritance within approximately five years, unless it is managed wisely.
• The most unwise actions regarding an inheritance include spending it on properties you cannot upkeep, letting it idle without use, or placing everything in a single investment.
• The most sensible action you can take is to talk to a professional. financial planner , ideally before you have inherited the money.

It might seem straightforward to think that getting a substantial amount of money, such as an inheritance, will permanently alter your financial standing. However, the truth is that this outcome hinges on how you choose to use those funds.

"As per Shala L. Walker, CFP, typically an inheritance vanishes within five years after obtaining it, unless it is put into financial assets or home equity," she stated.

Walker understands just how quickly and easily money can vanish. She has dealt with heirs who were handed sums large enough to transform their lives entirely but instead watched as they squandered it away, later reaching out to her for help post-facto.

She revealed five of the biggest mistakes you could make when inheriting money.

1. Holding onto the money for an extended period

If you hold onto your money, you might encounter three significant risks: The first one is that inflation will get caught up in it; the second reason is that you lose potential earnings from wise investments; and lastly, you're more likely to spend money that's readily available.

"Actually, I've observed that individuals often hold onto their money for extended periods; they're hesitant about investing it and feel uncertain about what actions to take, so they end up doing nothing at all," explained Walker.

Walker suggests consulting a financial advisor at the earliest convenience to get guidance on how to manage your money, which may include putting it into investments. diversified portfolio .

2. Purchasing an asset that you're unable to upkeep

A common error made by inheritors when dealing with substantial amounts of money is purchasing assets they cannot sustain over time, like a high-cost property.

The top problem is overspending," stated Walker. She has observed beneficiaries buying houses beyond their budget, sometimes using their entire inheritance for this purpose, which often leads to unmanageable property tax bills or properties that become costly to decorate and upkeep.

3. Keeping an inherited property that you're unable to manage financially

Not all inheritance comes in cash — some can be in the form of property. Walker said this kind of inheritance can be the trickiest, because heirs often have an emotional attachment to an asset they can't afford to maintain.

"In theory, this boosted their overall wealth, yet they had to rely on their readily available funds just to keep up with the expenses of the new home. Thus, financially speaking, they found themselves asset-rich but cash-poor," explained Walker.

She suggests thoroughly reviewing the terms and conditions of an inherited asset. This involves looking at current leases, outstanding debts, ongoing contracts, as well as the potential effort and inconvenience needed for upkeep of the property or asset.

Walker has encountered people who choose to hold onto an inherited property despite not having the means to sustain it financially due to emotional attachment. Often, they resort to using their savings and retirement funds to cover expenses.

Her primary suggestion: Avoid thinking you have to keep the asset.

4. Investing all your funds in a single location

Typically, it’s unwise to invest all your funds into a singular asset like an individual stock or real estate property.

"Should you be constructing a fresh investment portfolio, ensure it includes diversification—even when contemplating real estate investments. Distribute your assets to minimize potential risks," stated Walker.

5. Not speaking to a financial planner

If you've received funds or some type of property through inheritance, consulting with a financial planner will assist you in optimizing your inheritance to ensure you don't end up losing everything or find yourself in a more precarious financial position than when you started.

A financial advisor can assist you in creating a varied investment portfolio that encompasses real estate or major acquisitions, ensuring you have sufficient funds to maintain these assets over an extended period.

Finding a financial advisor It doesn’t have to be complicated. Utilize SmartAsset’s free tool to connect with up to three fee-only financial advisors in your vicinity within minutes. These advisors have undergone scrutiny from SmartAdvisor and adhere to a fiduciary standard, ensuring they work in your best interest. Start your search now.

The article was initially released in January 2021.

Read the original article on Business Insider

If you enjoyed this story, be sure to follow Business Insider on Microsoft Start.