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Receiving an inheritance my not be as pleasant as winning the lottery - after all, an inheritance means a loved one has died - but both raise the question of how to invest a sudden windfall.

Most windfalls require payment of taxes. In an inheritance, the estate generally pays the taxes, but other types of windfalls, like lottery winnings, require the recipient to pay the taxes. Ask your tax advisor what taxes will be applicable. The federal estate tax is scheduled to be repealed in 2010. However, Congress must take action to remove it, or the exclusion rates will be back in 2011.

After Uncle Sam takes his claim, you may be tempted to splurge on luxuries you couldn't previously afford - and you may regret it later. Make a list of those indulgences - remodeling the kitchen, buying a sports car or boat, taking a trip - and then set it aside for a few weeks. Re-evaluate your list and choose those you still feel good about.

Paying off debt may be your next inclination. Reducing debt versus investing depends on your circumstances, including:

• The amount of money you
  are inheriting
• The amount and type of debt
• Your age
• Your risk tolerance
• Your return expectations
• Your financial goals

In general, pay off debts that have higher interest rates than what you would earn by investing. Investing probably outweighs paying off mortgages, because they are tax deductible, and student loans, because they tend to have low interest rates.

Investing an inheritance follows generally the same process as investing your earnings:

• Establish your financial goals. Your overall goals may have changed because of the windfall.
• Determine your risk tolerance.
• Determine your need to access the money.
• Pay yourself first by investing for retirement.

If your circumstances include an ex-spouse or creditor who may have a claim against any windfalls you receive, you may want to consider a trust. The language of the trust gives you, the heir, the control and benefits without outright ownership. Additional income earned by the trust assets is also protected.

The difficulties in specifying a trust as the recipient of your inheritance is that it must be done before the donor dies and the donor's will must state bequests to you go instead to the trust. For many people, this is a difficult discussion to have with a relative, particularly a parent. A trusted advisor - investment advisor, accountant or attorney - may be able to help explain the benefits.



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