04/25/2013 05:53 pm ET | Updated Jun 25, 2013

How to Spend Your Inheritance

So you're getting an inheritance. You're not alone. Whether you are a recipient of one of the 20,000 or so estates that are worth more than $20 million that are transferred each year, or something less than that, it's estimated that there will be trillions of dollars inherited over the next few decades. Inherited money - a form of sudden wealth - has its own unique challenges unlike other forms of sudden wealth. As a financial planner who specializes in inheritance planning and working with clients who come into money suddenly, I have seen what works well. Here are six ideas for how to spend (and save!) your inheritance wisely:

1. Not all money is created equally. Just as a tax refund can feel like "found" money, inheritances can evoke a wide range of feelings that cause the recipient to treat the money very differently from the money they've previously earned and saved. If the beneficiary had a good or neutral relationship with the person who died, often there is a healthy response to the inheritance. However, if the relationship was negative, it is not uncommon to see the recipient consciously or unconsciously divest or disown themselves from the money by giving it away, spending it lavishly, or by making risky investments. The solution is to separate the conflicted relationship from the money - a therapist could be a big help here. If you are going to spend part of your inheritance, at least become conscious of your feelings so you can enjoy it.

2. Get it before you spend it. While most estates are settled in less than a year, there are others that can drag out for years. It's fine to spend some of your inheritance, but don't do it before you get the money. In addition to delays, estate taxes, administrative and attorney fees can eat into the estate shrinking your share.

3. Create and prioritize a wish list. Newfound wealth can spark all kinds of ideas - from buying a new house to taking a family vacation to remodeling the kitchen. Creating a wish list allows you to have fun thinking about what you could do without first having to write the checks. Take several weeks or months to think about what you would like to do, and then prioritize your list. Some of your once must-do wishes will fall to the bottom while others will rise to the top. The goal is not to do everything on your list, but the few that are the most meaningful to you.

4. Buy this. If you have assets, you are a target for a lawsuit. Go through your car and house insurance policies and make sure you are fully covered. Then call your insurance broker and purchase (or increase) a personal liability policy - sometimes called an umbrella liability policy. You'll want to buy coverage for as much as you are worth. Premiums are typically $250 a year for $1 million of coverage.

5. 10% rule. Most likely you will identify several things to buy or do. Your mission now is to make sure you don't spend more than 10% of your inheritance. While every situation is different, this rule-of-thumb will still leave you with 90% of your inheritance going to savings. And remember, 10% is the maximum to spend; not the minimum!

6. Buy a cactus; not a fern. Spending $50,000 on a new BMW costs a lot more than spending $50,000 on a family vacation. Why? The new BMW will raise your insurance premiums, maintenance costs, registration fees, and requires more expensive gasoline. Ferns require daily watering while cacti are content with once-a-month watering. Make sure you consider not just the initial cost but all of the ongoing costs.

Unfortunately, sudden wealth is often suddenly gone. To avoid this fate, use the tips above to spend a little of your inheritance and then save and invest the rest.

Content concerning financial matters, trading or investments is for informational purposes only and should not be relied upon in making financial, trading or investment decisions.