Paying Off Debts With Your Inheritance Money
Inheriting a large sum of money can feel both emotional and complicated. For one thing, you’re grieving the person you have recently lost, and for another, you suddenly have more cash at your disposal. So, what should you do next?
Can I Pay Off My Debts?
If you have debts, you probably would like to know if you can pay them off by using money gained from an inheritance. The answer is yes. However, you shouldn’t necessarily pay off everything. Let’s look at some of the factors you’ll need to consider when you receive an inheritance.
Is There an Inheritance Tax in Your State?
Before you start deciding which debts to pay off, remember that you may not get all of the money. There are six states that have an inheritance tax, and New Jersey is one of them. It’s important to contact an estate planning lawyer or a financial advisor to determine how much tax the state will make you pay. Inheritors are divided into classes. The class you’re in will determine how much tax you will have to pay.
Take It Slowly
Once you have decided what chunk the state gets, put the rest into a savings account while you decide what debts to pay off. Take your time when making this decision. Discuss your plans with your family and loved ones. If it’s a large sum of money, you’ll want to look back over the years and know you spent that money wisely.
Get Financial Advice
Seek out an estate planning lawyer or a financial advisor. They can take a look at your financial situation and give you tips on how to wisely invest your money and pay off your debts. Remember that your final decision should ease any financial woes you have and give you peace of mind.
Prioritize Your Debts
Your financial advisor will probably have you list all your debts, the amount you owe, and the interest rates on each. If you have more than one debt, try to pay off the ones that have the highest interest rate.
Your student loans, if you have any, should top your debt list only because their interest over the years can literally end up doubling the amount you owe. In addition, student loans can put you in a financial prison, so to speak. It’s very hard to get a large loan if you have student loan debt.
Medical debt is another priority debt you’ll want to take care of as soon as possible. Large medical debts can negatively affect your credit score, so the sooner you get rid of them, the better. However, before you do so, take a closer look at the bill. You shouldn’t take medical bills at face value. Is there a way to negotiate the bill’s total cost? If you have had a medical procedure and have a mountain of medical bills, get a medical bill advocate to help you negotiate the bills before you start sending out checks.
If you’d like to finish paying off your car so that you have extra spending money every month, this may be another good way to use your inheritance money. However, this isn’t always the case. Sometimes, there may be prepayment penalties. Read your contract thoroughly to see if your lender will penalize you for paying the car off early.
Finally, there’s your mortgage. Your mortgage may be the biggest debt you have, and if you have a large inheritance, paying all of it off or most of it may be tempting. However, go through your contract again before deciding whether this is beneficial. You may lose out on some tax benefits if you pay your mortgage early. In addition, like with car loans, there may be a prepayment penalty. Moreover, your home is considered a non-liquid asset, and if you pay off your mortgage too quickly, you risk depleting your home’s liquidity.
Paying off your debts with an inheritance can be a good idea. However, it’s important to get financial advice before doing so. At The Knee Law Firm, LLC, in Hackensack, New Jersey, we offer estate planning, estate litigation, and tax planning services. We can advise you on the best ways to pay off your debts and the best ways to spend your inheritance. It may be a better idea to invest your money rather than pay off your entire mortgage, for example.
For questions and advice, reach out to our firm online or at 201-996-1200. We would be happy to schedule an appointment.