(MoneyWatch) So the will says you're coming into money. There are 20,000 or so estates worth more than $20 million that are transferred each year, and it's estimated there will be trillions of dollars inherited over the next few decades. Inherited money -- a form of sudden wealth -- has its own unique challenges, unlike other forms of sudden wealth. As a financial planner specializing in inheritance planning and working with clients who come into money suddenly, I have seen what works well. Here are six ideas for how to spend (and save!) your inheritance wisely:
1. Not all money is created equally. Inheritances can evoke a wide range of feelings that cause the recipient to treat the money very differently from the dollars they've previously earned and saved. Good or neutral relationships with the deceased often generate a healthy response to newfound wealth. But when the relationship was troubled, it is not uncommon to see the recipient consciously or unconsciously disowning the money and divesting it by spending lavishly or making risky investments. A conflicted relationship must be separated from the money -- therapy could be a big help here. If you are going to spend part of your inheritance, you should at least be able to enjoy it.
2. Get it before you spend it. While most estates are settled in less than a year, there are others that can drag on for years. Go ahead and spend some of your inheritance, but wait until the money is in your hands. In addition to delays, estate taxes and administrative and attorney fees can eat into the estate, shrinking your share.
3. Create and prioritize a wish list. Newfound wealth brings with it many options -- from buying a new house to taking a family vacation to remodeling the kitchen. A wish list allows you to consider them carefully before you write any checks. So take several weeks or months to crystallize your ideas and then prioritize your list entries. Some of your former "must-do" selections may fall precipitously, while others may rise significantly. You cannot do everything on your list, so choose the items that are most meaningful to you.
4. Buy this. Assets make you a potential target for a lawsuit. Go over your car and house insurance policies and make sure you are fully covered. Then call your insurance broker and purchase (or increase) a personal liability policy -- sometimes called an umbrella liability policy. You'll want to buy coverage for as much as you are worth. Premiums are typically $250 a year for $1 million of coverage.
5. The 10% rule. Most likely you will identify purchases of things you've coveted or activities you've longed to check out. Just make sure you don't spend more than 10% of your inheritance. While every situation is different, this rule of thumb will still leave you 90% of your inheritance to invest. And don't rejigger this ratio.
6. Buy a cactus; not a fern. Spending $50,000 on a new BMW costs a lot more than spending $50,000 on a family vacation. Why? The luxury car will boost your insurance premiums, maintenance costs and registration fees, and it requires premium gasoline. Ferns require daily watering, whreas cacti can go a month without H2O. Take into consideration not only the initial cost but all of the ongoing costs.
Unfortunately, sudden wealth is easily squandered. If you want to avoid this fate, the tips above will help you spend a little of your inheritance and save and invest the rest.