Paying Off Debt From Inheritance

The other day I was listening to a local radio show about personal finances.  The host took a call from an emotional listener (I’ll call her Kelly) who had recently lost her mother to cancer. Kelly’s mother left behind a $100,000 life insurance policy, along with a number of other assets to be split between Kelly and her sister.

Over the last year or so Kelly and her husband have been getting their financial lives back on track. They had whittled their outstanding debts down to about $30,000 (from $50,000), spread evenly across a couple credit cards, an old student loan, and a car note.  It turns out their portion of the inheritance was just enough to pay off all the family’s debt plus $20,000.  Kelly felt conflicted about paying off debt with her inheritance money.

The show’s host seemed equally conflicted, even though the answer was obvious to me. Yes, the caller should use the money to be debt free by the end of the day.  How did I arrive at this answer so quickly?  A number of factors were at play.

Three Questions To Ask When Deciding To Use Inheritance To Pay Off Debt

1. Will I need to live on this money in the near future? This might be the case for a spouse who wasn’t working prior to their spouses death, or in the case of two retirees living off of the now deceased’s salary.  In Kelly’s case, her husband earns a good income, and they had some emergency savings already in place.  It wasn’t likely they would need to live on any of this inheritance.

2. Has my lifestyle changed? Consider whether or not the lifestyle that led you to debt has changed. If you are still overspending, using credit cards, and financing emergencies, then chances are you will go right back to that behavior after your debts are paid. This is the very reason most lottery winners grow broke – their lifestyles never change, just the amount of money they have to blow.

3. If you had the same amount of inheritance already in savings, would you go into debt to avoid spending it? This is really the same question in reverse.  Not using inheritance money to pay off debt is the equivalent of leaving money in savings while financing something(s) of equal value.  The only time this might make any sense is when financing a home at a very low interest rate, but even then, a free-and-clear home looks pretty attractive, too.

An Emotional Decision

Deciding whether or not to use an inheritance to pay off debt is a very emotional decision.  Any time you mix emotions with money you have the opportunity to make a very big mistake. But after losing a loved one it is hard to remain objective, and the tug of our emotions often leads to irrational decisions.

If you find yourself in this position, and aren’t sure what to do with the money, simply park it in a bank savings account for a couple months while you allow your emotions to heal. After that “cooling off” period you can again evaluate your financial picture and make a smart decision about how to handle the money.

Part of what bothered Kelly about using her mother’s inheritance money to pay off debt was a feeling that her mom would somehow disapprove, or be upset to know Kelly owed that much money. As a parent, I would want my kids to do what’s best for their family, and if being debt free was a goal for them, and it freed them from the bondage of being indebted to banks, then I would be happy to know that’s how they used the money.  I suspect most parents would feel exactly the same way.

Comments

  1. When my Grandfather passed away, I inherited $10,000. At the time, we were debt free except for the house. I put half the money on the house and the other half in the bank, and never once regretted it! I think it’s important to remember that decisions involving money don’t have to be all or nothing… you can do many things with a windfall.

    If I were in Kelly’s shoes… I would use the inheritance to become debt-free and I would view it as one of the greatest gifts my mother had ever given me.

  2. My opinion will probably be unpopular, but if my parents passed away today and recieved anywhere from 1k to 100k, I would put it into my house. If it was 1k, I would do some small upgrades that need done. If it was 100k, I would make a lump sum payment and drastically shorten the life of my mortgage.

    Inheritence is a gift to you and unless their is a will or some sort of strings attached to it, you are free to do with it as you please. Though I recommend not blowing it like lotto winners across the country…

  3. Since I was once in that very situation, I can relate. I went ahead and saved a bit of it for a car for my son (around 3K) since my father would have helped his grandson get his first car anyway, and then I went ahead and invested into my husband’s retirement. I personally believe that my father wanted me to have the $$ to do whatever I wanted.

  4. After graduating from med school, my wife and I had a total of over 140k in debt. Thankfully, my father had saved a lot for my education and even had some left over. He gave that over to me, but we felt torn as to apply the 60k to our debt or to put it away for something else. So, we did exactly as you said – we parked it in some mutual funds and left it there.
    We lived below our means for 4 years (with the goal of being debt free), then revisited the situation. At that time, we had chipped away at our debt to about 90k and our investments grew to about the same amount. Our financial advisor was wise enough to let us park our money at the time, but when we could eliminate our debt completely, he did nothing but encourage us.
    Because we had lived with debt for so long, we didn’t know what it would be like to not have any. But let me tell you, having a net-zero balance and being debt-free are two *very* different things! I was very cautious as to whether or not this was proper use of my gifted money, but felt it was the right thing to do.
    Well, it was a huge burden lifted from our shoulders, and we didn’t look back. We had the freedom to do whatever we wanted to, whenever. We were poor, but we were free. I’m a firm believer that there is no such thing as good debt, because the money still owns you. But, when you own the money, you can do whatever you want. The debt doesn’t drive your future decisions. (We’ve since been able to save money and have continued to be debt free).

  5. Even though it may sound morbid to some sensitive people, why not just ask the person if there is anything they don’t want you to do with the money, or if there are any “special conditions”? Unless it was an untimely and sudden death, then they must have been thinking about it already. Usually, they just want the receivers to do whatever makes them happy. If paying down debt makes you happy, then do so. Asking others what to do with it after the passing of a loved one means that you didn’t have the courage to talk about the subject when that person you cared about so much was alive. I can tell you from experience that it isn’t as hard a subject to approach as some people would like to believe it is.

  6. It’s money to be used just as any other would be used.

    Sentimentally tho, I would agree with buying or doing one special thing with a portion of it – like the car for the grandson above, or a small family vacation to some memory making place in honor of the giver, or a picture frame for a special photo of the person, etc. I think one wants to do something special with a part of the money, and in honor of the person, but that not ALL of it would need to be used that way. The parent left it to make the child’s life easier, I would think – so use it wisely would be all I would worry about there – and with respect and honor. (Yes, saving would fall into using it wisely)

  7. If the lifestyle has changed then put it towards debt but if the factors that led to the original debt have not changed then I would stick to the slow debt payoff so that the lessons are learned. I would not do anything with the money for 6 months though til the emotions are not so raw.

  8. Often, people do feel very attached to their inheritance – it is a tangible reminder of the person who is gone.

    That said, money is money. If somebody inherits money and they need it to live on….I’d be really worried. At some point, the money will be gone. What did they do before the inheritance came. No sir. I’d use that money to pay off debt without any hesitation and then I’d put a full stop on spending as much as possible.

  9. I think her mom would have wanted her to pay off debt, and smartly invest the remainder. Like others have said, what parent wouldn’t want their children to have a comfortable life? It sounds like they were working to not be in debt anyway, and that their lifestyle is a good one in that by paying off their debt they will be sure to not incur more.

    I had a similar issue, but without as much emotion. My great-grandmother passed away, and left $2,000 for each of her six great-grands. I had never ever met her, and while I was awed she would do that, it didn’t have the ‘sadness’ associated with it. I was in college at the time, and it went directly to my tuition, which helped me have $2,000 less in student loans.

  10. I guess I can see the conflict. I would definitely use the money to get out of debt. But my debt is widely looked upon as “responsible,” i.e, it’s all mortgage debt for a modest home.

    If my debt were credit cards and amounted to tens of thousands of dollars, I would look at spending my inheritance on that debt reduction as a colossal wasted opportunity. Instead of being in a good financial position and being able to use that huge windfall to do something long dreamed of, I would be using it just to get out of a hole.

    Don’t get me wrong – getting out of debt is always a good idea. But it’s a good idea in that it was a bad idea to get into debt in the first place. So having to use a once in a lifetime opportunity simply to hit the reset button to get back to financial neutrality would make me really mad at myself.

    Granted some people’s debt might be medical, or resulting from circumstances where they honestly had no other choice. But if it were all consumer debt on my credit card, I’d look at it as a wasted opportunity – no one’s fault but my own.

  11. If I were in their situation, I would use the money to pay off the debt. They will have a very large portion of money left over which can be used for savings or whatever else they desire that money be used for, but having $30,000 of debt while having the means of eliminating it just doesn’t make any sense.

  12. We did that, paid off debt and saved another $20,00 above the debt payoff in payments over the next 20 years. It is a good feeling to have less debt.

  13. Thanks for this article. We are in a similar situation, and I’ve been very conflicted over the whole thing…I still am.

    Yes, my grandmother would be disappointed to know how much debt I am in. However, it’s not debt I accrued by over-spending. I’ll spare everyone the sordid details, but we’ve had a bunch of just awful “luck” lately that has wrecked havoc on our finances.

    I’m still not sure what to do, but this gives me some things to think about.

  14. This is an interesting topic. Anyone in my family would say use it for what ever you want, no strings attached. I think it’s a very personal decision and will likely affect everyone differently.

    I would certainly put any inheritance towards paying off our house. We’d see the end of that massive burden far sooner than other wise and could then go on to bigger and better things debt free. I agree with other comments that say it doesn’t make sense to sit on the money while you still have a large debt to pay off.

  15. My husband recently inherited 80,000. After seeing our pensions and investments lose an average of 30% this year we decided the best investment for this money was to pay down our mortgage. Now we are left with a tiny mortgage and as we are 39 and 46 should have it paid off in the next 3 years. We have always paid cash for vehicles/stuff therefore the only debt we actually have is our mortgage. I live in Northern Alberta, Canada and our homes are some of the most expensive in North America. Even though our real estate market is starting to shrink I have confidence that we have made the right choice in the long run. We have no set mortgage payment and have a line of credit instead therefore we are able to pay down at any time as much as we would like. It feels good to own 90% of your home. As my husband is on 100% commission our pay fluctuates therefore the ability to clear out some debt is a relief.

  16. I am in this situation right now and disagree with almost all of you. My thought process is that the debt was taken on by me and should be paid off by me, because it is my responsibility. Therefore I have put this money away to earn interest to be used for future goals. Although it is in a place that it can be used for both an emergency fund and if necessary the debt could be paid off at one time but I don’t think that is the right choice.

  17. I would agree with your article: if you are already on a debt free track then you have the mentality to apply the money wisely to your remaining debt; however, if you are in debt and have not made any changes as to living above your means, then paying off your debt will just allow you to slip into debt again. Parking the money for awhile is a good choice then.

    Alyzabeth’s Mommy for Six Months!

  18. While emotions can certainly get in the way of money decisions, I think paying off a debt is the best way.
    It can help alleviate undo stress during the grieving process.

  19. What people don’t realize is inherited money is not marital property. If her marriage is under any kind of stress, she should save that money for herself to get on her feet. I have seen marriages fall apart after one party has used all their inheritance and then they have nothing.

  20. I’m with Teresa, though I’m not surprised that nearly everyone jumped on the same bandwagon with ‘put it all into the house’. The inheritance is not marital property unless comingled. Putting it into the house (if jointly titled) or against any joint debt comingles it, thereby making it attackable in the event of a divorce. Hey let’s face reality, divorces are the eventual result for 50% of marriages.

    I once got an inheritance and used a good chunk of it to extinguish our fairly large credit card debt. Within a year, the wife was at it again and ran up an even bigger credit card balance, then filed for divorce. Now if I had instead put that inheritance in an investment in my name alone (income producing property, dividend yielding stock, T bills, etc) it would have been legally untouchable by her and would likely have doubled in value by now.

    I recommend NOT commingling it and instead letting it help pay for the kids’ college education through it’s earnings. But preserve the principal if at all possible. This is what I feel best serves the memory of the decedent: for their financial generosity to have the longest, most far-reaching impact on the lives of their family.

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