4 things to do with an inheritance Coming into a windfall? Some smart inheritance planning can help you make the most of it. February 22, 2023 You just learned of the passing of a loved one. During this stressful and emotionally taxing time, you also find out that you’re receiving an inheritance. While you’re grateful for the unexpected windfall, knowing what to do with an inheritance can bring its own share of stress. Between now and the next few years, financial experts predict that baby boomers will bestow an estimated $30 trillion to $68 trillion to millennials during an anomaly that’s come to be called the Great Wealth Transfer. Many American households will receive generous inheritances, but the money can evaporate quickly without a good plan. In other words, if you receive an inheritance, take the time to do some inheritance planning, and resist the urge to spend it all at once. Not me, you say? Still, you might be asking, “What should I do with my inheritance money?” Follow these four steps to help you make smart decisions with your newfound wealth: 1. Take time to grieve your loss Deciding what to do with an inheritance can bring with it mixed emotions: a sense of reprieve for this unexpected financial gain and sadness for the loss of a loved one, says Robert Pagliarini, CFP®, president of a financial planning and investment management firm. During this time, you might feel confused, upset and overwhelmed. “A large inheritance that pushes you out of your financial comfort zone can create anxiety about how to best manage the money,” Pagliarini says. As an inheritor, Pagliarini adds that you may feel the need to be extra careful with the funds; even though you know it is your money, it could feel borrowed. The last thing you want to do when deciding what to do with an inheritance is make financial decisions under an emotional haze. Avoid making any drastic moves right away, such as quitting your job or selling your home. Some experts suggest giving yourself a six-month buffer before using any of your inheritance, using the time instead to develop a financial plan. While you are thinking about things to do with an inheritance, you can park any funds in a high-yield savings account or certificate of deposit. “A large inheritance that pushes you out of your financial comfort zone can create anxiety about how to best manage the money.” 2. Know what you’re inheriting Before you determine the things to do with an inheritance, you need to know what you’re getting. Alex Caswell, CFP®, wealth planner at a wealth management firm, says how you use your inheritance will largely depend on its source. Typically, Caswell says an inheritance will come in the form of assets from one of three places: Real estate, such as a house or property. As Caswell explains, if you receive assets from real estate, you will transfer them into your name. As the inheritor, you can choose what to do with the assets—typically sell, rent, or live in them. A trust account, a legal arrangement through which funds are held by a third party (the trustee) for the benefit of another party (the beneficiary), which may be an individual or a group. The creator of the trust is known as a grantor. “If someone inherits assets through a trust, the trust documents will stipulate how these assets will be distributed and who ultimately decides how they are to be invested,” Caswell says. In some cases, the assets get distributed outright to you; in other instances, the trust stays intact and you get paid in installments. A retirement account, such as an IRA, Roth IRA, or 401(k). These accounts can be distributed in one lump sum, however, there may be requirements related to the amount of a distribution and the cadence of distributions. When considering things to do with an inheritance, know that inherited assets can be designated as Transfer on Death (TOD) or beneficiary deeds (in the case of real estate), which means the assets can be transferred to beneficiaries without the often-lengthy probate process. An individual may also bequeath cash or valuables, like jewelry or family heirlooms, as well as life insurance or stock certificates. Caswell says if your inheritance comes in the form of investment assets, such as stocks or mutual funds, you’ll want to think of them as part of your own financial picture. “All too often, we see individuals end up treating inherited assets as a living extension of their passed relative,” Caswell says. Consider how the investments can be used to support your financial goals when thinking about things to do when you get an inheritance. 3. Plan what to do with your financial gain Just like doing your household budgeting, it’s important to “assign” your inheritance to specific purposes or goals, says Pagliarini. As you’re going through the inheritance planning process, you might want to start budgeting with the 50-20-30 rule since the simple concepts of save, spend, and give may be a good place to start when deciding on things to do with an inheritance: SAVE: Bolster your emergency savings account: You should have at least three to six months of living expenses saved up to avoid unexpected financial shocks, such as job loss, car repairs or medical expenses. If you don’t and you’re deciding what things to do with an inheritance, consider parking some cash in this bucket. Save for big goals: Now could be a good time to boost your long-term savings goals and pay it forward. Putting money toward a child’s college fund or getting your retirement savings on track are some smart things to do with an inheritance. SPEND: Tackle debt: If you’re evaluating what to do with an inheritance, high-interest debt is something you could consider paying off. Spending on debt repayment can help you save on hefty interest charges. Reduce or pay off your mortgage: Getting closer to paying off your home—or paying it off entirely—can also save you in interest and significantly lower your monthly expenses. Allocating cash here is a win-win. Enjoy a little bit of it: It’s okay to use a portion of your inheritance on something you enjoy or find rewarding. For instance, you might choose to plan a vacation without going into debt, you might want to invest in more education, or you might want to make another big purchase. GIVE: Donate funds to charity: Thinking about your loved one’s causes or your own can continue legacy goals and provide tax benefits. 4. Don’t get tripped up on taxes When deciding what to do with an inheritance, taxes will need to be considered. “It is extremely important to be aware of all tax ramifications of any decision around inherited assets,” Caswell says. You could be required to pay a capital gains tax if you sell the gift (like property) that was passed down to you, for example. Also, depending on where you live, your inherited money could be taxed. In addition to federal estate taxes, several U.S. states impose an inheritance tax and/or an estate tax. Since every situation is unique and tax laws can change, when considering things to do with an inheritance, consult a financial advisor or tax professional for guidance. Make your windfall count Receiving an inheritance has the potential to change your financial picture for good. When thinking about the things to do when you get an inheritance, be sure to give yourself ample time to grieve and to understand all of your options. Don’t be afraid to lean on the experts to get up to speed on any tax and legal implications you need to consider. Planning can go a long way toward making the right decisions concerning your newfound wealth. Being responsible with your inheritance not only helps ensure your financial future, but will also honor your loved one’s legacy. If you need more help determining what to do with an inheritance, you might consider creating a financial vision board, which can help you visualize your financial life goals. Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.