Receiving an inheritance can be life-changing. It can be unexpected, of uncertain timing – and can come with a lot of emotion attached. A lot of people feel an obligation to ‘do the right thing’ when considering how to invest an inheritance.
But what’s the right thing? If you’ve inherited money – or received a gift within the giver’s lifetime – here are some simple approaches to get the best out of a cash windfall.
1. Focus on wealth preservation
Becoming wealthy is about growing your assets. Staying wealthy is about preserving them and having something to show for it.
That means minimising your risk by diversifying your investments widely, and walking away from higher returns that present too much risk.
It also means figuring out a sustainable way to manage your investments, including long-term tax planning.
2. Clear down debt before you invest an inheritance
Inheriting a lump sum is a great opportunity to remove some or all of your debt burden immediately – especially expensive debt such as overdrafts and credit cards.
Few investments will give you a guaranteed return which beats the savings from paying off expensive debt.
3. Take time, and take advice
Avoid rash decisions if you’ve come into a meaningful sum. Take advice from a reputable financial provider, and consider getting an element of return in line with interest rates while you’re deciding on next steps (here’s one way to do that).
That said, decisions will need to be made. Staying 100% in cash is not the right answer for most people who have come into a decent sum of money. Put simply, there are many more productive ways to get your money working for you.
A good advisor will devise a tailored plan that fits with your circumstances. At a minimums that will involve developing an investment portfolio appropriate to the timescale, and complexity and level of risk you’re prepared to bear. A one-off lump sum can also be an opportunity for transformational changes to your financial life – for example investing in education, clearing the mortgage, changing career, or accelerating your retirement by topping up your pension.
Whatever decisions you take, they should also be part of a broader plan, for example to protect your wealth and your family, optimise for tax, and take into account career and retirement plans.
4. Keep it safe
While you are making your plans, put your money somewhere safe.
Remember that the first €100,000 of cash in Irish banks is State-guaranteed. Beyond this amount, it may be worth spreading among numerous financial providers, or even State Savings.
5. Consider giving
For some people, a windfall lump sum is an opportunity to be generous. At its simplest, in Ireland you can give €3,000 away to unlimited numbers of people each year with no tax consequences.
Many people use this exemption from gift tax as a way to set up regular investment accounts for their children, pushing wealth down the generations slowly and steadily while reducing exposure to inheritance tax and gaining investment returns along the way.
For larger sums, now may be the time for detailed inheritance tax planning to ensure future windfalls for the people you’d like to benefit in the long term.
6. Prepare for it… if you can
Talking with loved ones about money can be difficult. But an honest discussion can save a lot of money, tax and heartache later on. You could even discuss how they think you should invest an inheritance.
Much of the tasks here fall to the person planning to give away assets. There are many things you can do. In particular writing a will, communicating your wishes, locating and organising documents, dematerialising shares, and keeping assets in as few countries as possible will make things much easier when it comes to passing on an inheritance or gift.
7. Recognise the emotional aspects when you invest an inheritance
Discussing money in the context of the death of someone close to you can seem cold. It’s important to recognise the emotional context that can come with inheriting money.
Some beneficiaries find splitting an inheritance into different chunks, some earmarked for practicalities, others for pleasure, helps do justice to the money received.
Above all, don’t let an inheritance become a source of guilt. It’s possible to be grateful for the money you have received and still make rational decisions in your best interest. For example, long-term investing is the best way to grow your wealth – but it might mean accepting the risk of short-term losses.
Ultimately, if someone has left you money, they wanted you to benefit from it. It’s your money now, and it’s up to you to get the best out of it.
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