What’s the best way to handle a financial windfall or inheritance?

Financial windfalls come in many forms: an inheritance, a year-end bonus, or even a winning lottery ticket. But for many people, figuring out what to do when an unexpected sum of money falls in their lap — whether it’s a few hundred or a few hundred thousand dollars — is no easy call.

Popular options for handling a lump sum include paying down debt and buying a house, but those choices carry their own trade-offs, financial experts say. The experts recommend that recipients thoroughly review their own finances and completely understand the tax implications of a windfall before deciding what to do with the money.

No matter how you use a windfall, planners say it should have a long-term benefit, such as getting out of debt or saving for retirement. Don’t blow it all on a new car or on items that could get you deeper in debt, like starting home renovations, which are notorious for costing more than anticipated.

Take these 6 important steps

1. First, put the money into a safe place

For example a liquid investment such as a money market fund, and then take stock of your situation. You should guard against those who offer get-rich-quick schemes or otherwise want to share in your windfall. Once you have hired an attorney or other professional to help you manage your new wealth, it might be a good idea to refer all of the requests that you receive to that person.

2. See a tax professional and analyze the tax consequences

Recipients need to know what taxes might be owed on the lump sum. You don’t want a surprise tax bill, especially one for which you haven’t set money aside. It’s a good idea to contact whoever sent the check — the executor of a will or the state lottery office, for example.

3. Consider how the windfall affects your overall financial situation

Making the most of a windfall starts with knowing your financial personality: Do you hoard money or spend too freely, or in amounts beyond your income? An honest assessment is essential. It doesn’t mean you have to accept who you are. You can change. But you have to be honest before you can change anything.

4. Create a budget

Recipients should analyze their income and spending to know where their money goes every month, from mortgage payments to lunch. That cash-flow analysis should also include a tally of all outstanding debts. This should ideally be done with a financial planner or coach.

5. Speak with a financial planner

Careful planning is essential to making the most of your windfall. A Financial Planner will look at your overall situation and create a plan to match your temperament, spending habits and future goals and dreams. He/ she will look at the following areas:

• Eliminating debt - on credit cards this can make a lot of sense but must be paired with a change in spending habits. People who are running up their credit cards are living beyond their means. Getting a windfall might be a good time to get priorities straight.

• Paying down mortgage debt, however, is more complicated. If you are close to retirement paying off your mortgage is good because it eliminates what for many is the largest single monthly expense. But many planners say it also makes sense to keep mortgage debt — if it’s at a good rate — because you can deduct the interest you pay on it from your taxable income. Instead of using a lump sum to pay it off, you might find that money works more effectively elsewhere. For example, if you are paying 6 percent for a mortgage and your marginal tax rate is 25 percent, then really you are paying an after-tax rate of 4.5 percent rate on that loan. If you can invest the lump sum in a certificate of deposit offering 6 percent, you might be better off putting the money there — or into other high-yield investments.

6. Consult with an estate planning attorney

To create or update your will, trust and other necessary documents.

Of course, many people who get money they weren’t expecting feel an urge to spend it on a treat for themselves.
Recipients should give in to that temptation — but within reason.

Take a cruise or buy that iPhone, but don’t blow it all! It should be a small, token piece of the entire amount.