What to Do with an Inheritance: A Guide to Making Thoughtful Decisions

Inheriting money or property can bring a mix of emotions—grief for the loss of a loved one, relief at receiving financial support, or even confusion about how to manage your new assets. While it’s understandable to feel overwhelmed, an inheritance can provide a significant opportunity to secure your financial future. The key is to make thoughtful, well-planned decisions that align with your goals and long-term well-being.

In this blog post, we’ll walk you through the essential steps of what to do with an inheritance, offering tips on managing money, property, and investments. From paying off debts to creating an estate plan, here’s your guide to making the most out of your inheritance.

1. Take Time to Process Your Emotions

Before diving into financial decisions, take some time to process the emotional side of the inheritance. Losing a loved one can be difficult, and receiving an inheritance can sometimes feel bittersweet. Give yourself space to grieve, reflect, and talk with family members if needed. Taking care of your emotional health is just as important as making financial decisions.

Tip: Consider speaking with a financial advisor or therapist to help guide you through both the emotional and practical aspects of the inheritance.

2. Understand the Tax Implications

The first step in managing an inheritance is understanding the tax implications. Depending on the value and type of inheritance, you may owe taxes or face certain reporting requirements. Here are some things to consider:

- Inheritance Tax: In some states, heirs are required to pay inheritance taxes on certain assets. The amount depends on the state you live in, the size of the inheritance, and your relationship to the deceased.

- Estate Tax: The estate may owe federal or state estate taxes if its value exceeds a certain threshold. However, heirs generally don’t have to pay estate taxes directly; they are paid from the estate’s funds.

- Income Tax: If you inherit an investment or a retirement account (like an IRA or 401(k)), you may have to pay income tax on the distributions you receive. Consult with a tax professional to understand how to handle these assets.

Tip: Working with a tax professional or estate attorney can help you navigate the complex tax rules associated with inheritances and minimize your tax burden.

3. Pay Off Debts and Financial Obligations

If you have personal debt—such as credit card balances, student loans, or car loans—it’s often a good idea to use a portion of your inheritance to pay down or pay off these liabilities. Eliminating high-interest debt can have a significant positive impact on your financial health.

If you’ve inherited an estate with debts, the executor of the estate will typically handle paying off any liabilities before distributing the remaining assets to the heirs. However, if the estate’s debts exceed its value, some assets may need to be sold to cover those debts.

Tip: Paying off high-interest debt should be a priority, but be sure to keep an emergency fund intact to cover unexpected expenses.

4. Build or Strengthen an Emergency Fund

One of the best uses for an inheritance is to build or enhance your emergency fund. Financial experts recommend having enough money saved to cover 3-6 months of living expenses in case of unexpected job loss, illness, or other emergencies. If you already have an emergency fund, consider increasing it to provide even more financial security.

Tip: Consider putting your emergency fund in a high-yield savings account or a money market account for easy access and a higher return.

5. Invest for the Future

If you’re in a strong financial position and have sufficient savings, investing your inheritance can be a great way to build wealth for the future. Whether you’re new to investing or have been doing it for years, here are some investment options to consider:

- Retirement Accounts: If your inheritance includes cash, consider contributing to a retirement account like a 401(k) or IRA. This will help you save for the future and take advantage of tax benefits.

- Stock Market: If you’re comfortable with risk, investing in stocks, mutual funds, or exchange-traded funds (ETFs) could offer long-term growth potential.

- Real Estate: If the inheritance includes property, consider whether it should be kept, sold, or rented out. A rental property can provide a steady income stream, while selling the property can give you cash to invest elsewhere.

- Bonds: If you’re looking for a safer option, bonds can provide fixed returns with less risk than stocks.

Tip: If you’re unsure about where to invest, a financial advisor can help you create a diversified investment strategy based on your goals and risk tolerance.

6. Consider Your Long-Term Goals

An inheritance can be an opportunity to work toward your long-term financial goals. Whether that’s buying a home, funding your children’s education, or saving for retirement, this windfall can be the boost you need to get closer to those milestones. Take time to reflect on your goals, prioritize them, and develop a plan for how to use the inheritance to support them.

Tip: Set specific, measurable goals to keep yourself on track. For example, if you plan to buy a home in five years, start saving for a down payment now.

7. Create or Update Your Estate Plan

Receiving an inheritance can be a wake-up call about the importance of estate planning. If you haven’t already created an estate plan, now is the perfect time to do so. If you already have one, consider updating it to reflect the changes in your financial situation.

Important estate planning steps include:

- Creating or updating your will to outline how your assets will be distributed upon your death.

- Setting up a trust to manage your assets and reduce estate taxes.

- Designating beneficiaries for your retirement accounts, life insurance, and other assets.

- Establishing durable power of attorney and healthcare directives in case you become incapacitated.

Tip: Consult with an estate attorney to ensure your estate plan is up to date and aligns with your new financial situation.

8. Charitable Giving

If you’re in a strong financial position and have a desire to give back, consider charitable donations as part of your inheritance plan. Not only can this benefit the causes you care about, but it may also offer tax deductions. If the inheritance includes specific assets, such as appreciated stocks or real estate, donating those assets directly to a charity may provide additional tax benefits.

Tip: Look into donor-advised funds or charitable trusts for more structured giving options.

9. Consult Professionals

Managing an inheritance can be a complex task, and you don’t have to do it alone. Consider working with professionals to ensure you’re making the best decisions for your financial future:

- Financial Advisors: Help with investment strategies, retirement planning, and overall financial goals.

- Estate Attorneys: Assist with creating or updating your will, trust, and other estate planning documents.

- Tax Professionals: Guide you through tax implications, inheritance taxes, and investment tax strategies.

Tip: Before making significant financial decisions, consult with professionals who can offer expert advice tailored to your situation.

10. Avoid Impulse Spending

While it’s tempting to treat yourself or splurge on a big purchase after receiving an inheritance, it’s important to avoid impulse spending. Large, one-time expenses like a vacation or luxury items can feel exciting, but they often don’t contribute to long-term financial security.

Instead, focus on making decisions that will benefit your future, such as saving, investing, or paying down debt.

Tip: Set aside a portion of the inheritance for fun or experiences, but keep your long-term financial goals in mind when deciding how to spend the rest.

Conclusion

An inheritance can be a life-changing event that provides you with a unique opportunity to secure your financial future, pay off debt, invest in your goals, and leave a lasting legacy. However, it’s important to approach the inheritance thoughtfully, avoid rash decisions, and take the time to plan for the future. By working with professionals, prioritizing your financial health, and making intentional decisions, you can use your inheritance as a stepping stone to greater financial stability and personal fulfillment.

Take your time, make informed decisions, and turn this opportunity into a positive and lasting impact on your life. If you’d like to speak to one of our Certified Probate Experts about your situation, give us a call at 503-389-0510 or email us at info@probatecarenow.com.