Investing an inheritance brings challenges, requires strategy

Inheritances are a taboo subject for many people. After all, most of us would rather not think about losing a parent or other relative. However, baby boomers stand to inherit nearly $11 trillion in the coming decades. The average bequest is expected to be about $90,000 enough to have an impact on most people's fi-nances and to require changes in investment and estate planning. Regardless, it's important to develop a plan for managing any assets that you inherit.

Consider your financial goals

The challenges and risks facing new heirs are especially strong immediately after funds are inherited. However, if you are prepared for the transition, you'll be more likely to make decisions that will benefit you in the long-run.

For example, spending away the windfall may be tempting, but when the money is gone, you may be no better off than you were before. Instead, limit your initial spending to a small percentage, say 5 percent, and then have a clear picture of how you'll invest the remaining funds to achieve your goals.

Develop an investment strategy

Depending on the type of inheritance you receive and your financial goals, you may want to re-evaluate your financial situation and choose a variety of different investments.

For example, suppose you inherit a portfolio of bond mutual funds and your primary investment goals are long term saving for retirement and paying for your young child's college education.

You may want to sell a portion of the bond portfolio and reinvest in stock mutual funds to benefit from the potentially higher returns over time. However, before you change your holdings, review your overall asset allocation to ensure that you achieve a desirable mix of investment classes.

Obtain professional advice

Another factor to consider is whether you have the knowledge to manage in-herited investments. Even if you successfully manage your own investments, you may not have the time to devote to monitoring your newly expanded portfolio.

Make sure you choose an adviser that you trust and one who puts your interests first. The value of a competent investment adviser will far exceed the cost of hiring this professional. Saving a few dollars by doing the work yourself or hiring a less-experienced or less-qualified adviser will end up costing you a lot more money in the long run.

Tax issues

In some cases, allowing inherited as-sets to continue to grow while drawing from other funds may benefit you. For example, if you inherit both taxable as-sets and assets in a tax-sheltered retirement plan, you should identify the op-tions available to you under the tax law. If possible, draw on any taxable assets before tax-deferred assets, so that you prolong the benefits of the tax shelter.

It also is important to remember your own estate-planning circumstances when you are faced with the decision of whether or not to accept an inheritance. If requirements are met, you may be able to refuse all or part of the bequest.

Depending on your overall financial picture, accepting an inheritance could increase the tax liability on your estate. If you already have considerable assets of your own, disclaiming an inheritance and allowing assets to pass to your children may reduce the size of your taxable estate. The net result is that more money will reach your heirs, and that's the bottom line. Even a modest inheritance that you don't need could benefit your children, who may not be as financially se-cure as you are. However, consult your tax and/or legal adviser to see whether a disclaimer would direct assets in a beneficial manner.

(David Compere is a vice president and trust officer with Springfield Trust Company, a locally-owned, independent trust company managing ap-proximately $425 million in investments for families, businesses, charities and foundations).