If you’ve recently received a financial windfall, whether it be from a lawsuit settlement, an inheritance, or a large bonus at work, it’s important to take the time to consider your options before making any major decisions. While it can be tempting to splurge on a new car or a luxurious vacation, it’s important to remember that your windfall is a temporary event and it’s important to plan for the long term. One important aspect of managing your financial windfall is to consider estate planning.
What Is Estate Planning?
Estate planning is the process of preparing for the management and distribution of your assets after your death. It can help ensure that your wishes are carried out, minimize the risk of disputes among your heirs, and minimize the impact of taxes and other expenses. While estate planning is often associated with the wealthy, it’s actually important for everyone to have at least a basic plan in place.
Understanding Taxes
One aspect of estate planning is determining how much of your assets will be subject to federal estate taxes. Unless your estate is valued at more than $5.43 million — or $10.86 million for a married couple — you’re exempt from federal estate taxes. This means that you can leave your assets to your heirs without worrying about a significant portion being taken by the government. If your estate is larger than this exemption amount, it’s important to work with an estate planning attorney to determine the best way to minimize the impact of estate taxes.
Asset Distribution
Another important aspect of estate planning is deciding how you want your assets to be distributed after your death. This can include deciding who will inherit specific items, such as a family heirloom or a valuable piece of art, as well as deciding how your financial assets will be divided. It’s important to be specific in your instructions to avoid any misunderstandings or disputes among your heirs.
How Settlements Fit In
If you receive a settlement from a lawsuit, it’s important to consider how that settlement will fit into your overall estate plan. For example, if the jury awards $100,000 in total damages, and you were found to be 20% responsible for the accident, you will only receive 80% of the $100,000 settlement. This means that you’ll need to consider how the settlement will be taxed and how it will be distributed among your heirs.
Another aspect of managing a financial windfall is determining the best way to invest the money. One option is to make home improvements, which can increase the value of your home and potentially provide a return on your investment. Remodeling Magazine’s 2019 Cost vs. Value Report found that the average American homeowner spends $22,636 on a new asphalt shingle roof of midrange quality. That new roof will increase the home’s value by $15,427, on average. That works out to 68% of the investment. This means that the new roof will pay for itself within a few years, and any additional value will be a bonus.
Windfalls and Retirement
Another option for investing your windfall is to put the money into a retirement account, such as a 401(k) or an IRA. This can help ensure that you have a secure financial future and can also provide tax benefits. It’s important to consider the fees and investment options available when choosing a retirement account, as well as your own financial goals and risk tolerance.
The best way to manage your financial windfall will depend on your individual circumstances and financial goals. It’s important to take the time to consider all of your options and to work with a financial advisor or estate planning attorney to determine the best course of action. By carefully planning for the future, you can make the most of your windfall and ensure that it benefits you and your loved ones for years to come.
