Never Do These 5 Things After Inheriting A Large Amount Of Money

A large inheritance can be transformative, especially for someone who's struggled financially in the past. Learning you're a beneficiary of a relative's large estate is a sort of bittersweet. The knowledge that you'll be taking in a considerable amount of money or a number of valuable assets is something that creates a sense of happiness and stability, no matter your personal circumstances. But the elation you might feel while learning about your inheritance is muted by the loss of a loved one, to be sure. As a result, many people bequeathed a big inheritance might still be overwhelmed by the emotional wreckage of the loss, clouding their judgment in numerous ways.

Unfortunately, there are plenty of ways to waste an inheritance. And those who have suddenly been given a large amount of money may not have the tools necessary to navigate the new responsibilities that also come along with the cash. Things like budgeting and saving might seem far less important once a gigantic inheritance check hits your bank account. But it's still important to maintain strong financial management qualities in order to continue enjoying the financial stability you've built over a lifetime of earning, saving, and spending. The following five actions are among the worst actions you can take after inheriting a large sum of money.

1. Don't immediately buy expensive new things

The most important thing you should avoid engaging in when inheriting a great deal of money is extravagant spending. Large purchases eat away at your financial reserves in striking fashion. It's for this very reason that major expenses typically require lengthy savings strategies and quite a bit of planning. Saving for the down payment on your first home, for instance, can take months or even years depending on your unique financial circumstances.

If you've inherited part or all of a large estate, one of the most debilitating actions you can take is to indiscriminately pull out your debit or credit card. Living below your means is always sage financial advice, and this will certainly change with the new influx of cash coming into your bank account. It's even something that the world's wealthiest often prioritize heavily. But the reality is that people who haven't lived with this enlarged net worth won't understand the new calculation of "their means" in this present moment.

Taking a beat and spending some time understanding where you now sit financially post-inheritance will help you manage this new capital responsibly. As well, it might be tempting to go out and invest in a more luxurious car or update your wardrobe. But many purchases still might involve financing, which can eviscerate your inheritance if you don't carefully plan how much you'll owe every month in repayments.

2. Don't stop saving up for retirement

A large inheritance of money may also seem to act as a suitable replacement for retirement savings. Generally, a parent might pass away when their children are in a phase of life that sees them actively thinking about their own retirement. Barring unforeseen circumstances or complications, an adult child is likely to lose their parents sometime in their 50s or even 60s. However, no matter how much money is left to you in a loved one's will, saving for retirement should never stop until you're ready to begin drawing down on these investments.

Emergencies, changes in circumstance, and various other life events can alter your financial plan substantially. When you inherit a large sum of money, it may be tempting to splurge with it or send it all into your retirement plan — as a replacement for further contributions. Yet, so many things can change between today and those future moments in which your retirement accounts will kick in.

Furthermore, remember that your savings will ultimately become someone else's inheritance when they arrive at their own moment of grief and loss. Not only does retirement savings offer itself as a tax-advantaged means of setting aside money (and a way to reduce yearly taxable income), but every dollar you save today will grow into greater financial stability for your future, as well as the loved ones you hope to leave money behind for.

3. Never invest it all in illiquid vessels

Liquidity is king. It's a good idea to stash away some of your financial resources in illiquid savings and investment assets, but a large portion of your savings profile should remain in vessels that you can withdraw from if the need arises. Generally speaking, savings tools like bond and CD assets will offer a higher return on investment than a savings account that guarantees you quick access. These savings tools have to offer something to investors for people to actually utilize them, and this often comes in the form of higher interest earning potential.

Yet, no matter how hard you try, there's always a tendency for lifestyle creep to come into play. If you have placed the entire sum of your inheritance in an illiquid investment vehicle, managing daily expenses that have increased as a result of this newfound wealth can prove extremely difficult and is often financially painful. In addition, you may be required to relinquish some of the inheritance in taxes. Alternatively, if you've inherited an investment property, some cash on hand will be required to manage upkeep and other routine expenses. Life is messy, so keeping an appropriate amount of this inheritance in easily accessible savings vessels is crucial to maintaining positive cash flow and budgetary math.

4. Avoid flaunting your new wealth online

It might seem obvious, but it's absolutely critical you avoid posting about your new wealth situation or otherwise flaunting it online or even around your community. By drawing attention to the fact that you've inherited a considerable amount of money, you'll create two unique sets of problems that are intensely difficult to deal with. First of all, drawing attention to your inheritance can place a target on your back for thieves, burglars, and scammers who prowl digital and physical space to find their next target and his or her vulnerabilities. In the same way that it's a bad idea to post about when you'll be on vacation and away from home for an extended period of time, noting your newfound wealth is a great way to draw malicious actors onto you.

But perhaps less obvious, allowing people in your circle to know about how much money you've inherited can create a sticky situation with friends or family members. After inheriting a large sum of money, your friends might become a bit clingy, actively or passively looking to ride your coattails. Friends might come to assume that spending time with you will result in activities getting paid for without them having to reach into their own pocket. Some friends might even expect you to act more generously, creating strain in the relationship. It's just easier to keep these details close to the vest.

5. Don't forget to consider your tax burden

Finally, it's important to remember that you may be required to pay inheritance taxes on any money you've gained as the beneficiary of another person. While the federal government doesn't impose any inheritance tax on individuals who are bequeathed any assets or cash, six states do. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania all stipulate inheritance taxes in their state filing requirements. However, most people won't have to contend with this requirement, since a miniscule number (roughly 2% of all taxpayers, per TurboTax) are assessed inheritance taxes. While each state will vary in its own assessment, the tax is only applicable once your inheritance amount rises above a certain threshold.

If you're the executor of a loved one's estate, you may have to manage estate tax burdens before you distribute assets according to the will. The same general rules apply when it comes to estate taxes and many beneficiaries will never have to concern themselves with this feature of the tax code. However, in the case of a sizable inheritance, it's always worth exploring whether or not you must act in order to remain compliant with legal regulations, both federally and in your state.