Aditya Birla Sun Life Mutual Fund

How to plan a sudden inheritance?

Nov 07, 2019
5 mins | Views 6918

Everybody likes to receive a sudden windfall. But inheritances are a tricky affair. Many people who receive a large inheritance have little left of it within a couple of years. Most people are not prepared to handle the financial management involved with handling inheritances. The added emotional stress makes the process more difficult.

Here are five things you should do to in case you happen to be lucky to get a sudden inheritance:

  • Step #1: Stop. Look. Go

    Remember as kids, when you were taught to cross a road. You need to stop, look carefully on both sides for approaching traffic and then only go ahead.

    When you receive a sudden inheritance, do not make immediate plans to spend it. Usually it is seen as an additional income or easy money and hence the temptation to spend it on frivolous things or fulfill luxurious desires is very high.

    If you want to judiciously utilize the inherited money, you can park it in traditional investment instrument or an ultra short term debt funds for about six months. This time frame will enable you to gain some perspective and draw a robust investment plan for it, while it earns some reasonable returns. One may even take the help of a financial advisor.

    Expert Tip: Decisions made right after receiving the inheritance are usually emotionally driven and not the best ones from the perspective of financial management.

  • Step #2: Fund for the golden days

    Putting a portion of the inheritance towards your retirement fund is a wise idea. This will ensure that you can enjoy your golden days completely without worrying about medical bills, daily expenses, etc.

    Expert Tip: Create a retirement corpus and put an amount in it for the long term so that you do not need to think retirement planning again!

  • Step #3: Clean the debt sheet

    If you have some debts in your balance sheet, use the inheritance to clear them off or reduce them. This will help to free future cash-flows and save you the amount which would have gone towards the interest on those debts. It will also positively impact your CIBIL scores which can come handy in the future.

    Expert Tip: Remember to surely pay off the so-called “bad” loans, where the interest is very high without much benefit in terms of taxation, etc. like personal loans and credit card. Good loans like home loans, etc. can still be carried on. However, before paying off your loans always check for pre-payment clause.


  • Step #4: Taxman Calling?

    Inheritance Tax was abolished in 1985. As per the Income Tax Act, no tax is applicable on inheritances now. However, any income that is generated from the inheritance or through its investment attracts tax.

    For instance, if you have inherited a property, no tax is levied on the receipt of the inheritance. However, if you rent out this property then that income needs to be included for tax calculation purposes. Similarly, if you sell that property in the future, it will attract capital gains tax. The time of sale will determine if it will be treated as long-term or short-term capital gains.

    Expert Tip: Keep your taxes in mind for all transactions as the same can surely be asked for review or questioning later, especially if the inheritance is of a significant amount.

  • Step #5: Figure out the technicalities

    One must ensure that all the paperwork for establishing inheritance are in place. This will ensure there are no complexities in receiving the money or from a taxation perspective.

    Expert Tip: Consult a professional, especially if you are not sure of what and how. Inheritance is once-in-a-lifetime affair and one should be careful in such dealings.

Final Words

Do not think of inheritance as an easy way out. Someone has entrusted their property or wealth to you. Give it the same respect that you would give your own hard-earned money. Respect it, invest it and grow it. That way you may be able to leave an inheritance for a loved one in the future and enriching their lives.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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