What to Do When You Receive an Inheritance

Getting an inheritance brings mixed feelings. Money helps, but it comes during a tough time when you’re grieving. Without proper planning, this sudden money can slip through your fingers or create family tension. This guide will help you handle your inheritance wisely, whether you’ve just received one or expect to in the future.

The Emotional Side of Inheriting Money

As J.P. Morgan Wealth Management points out, “Finding out your parents or grandparents left you a significant amount of money can be both exciting and unsettling.“

You might feel:

Sad about losing someone important to you
Uncomfortable about getting money from someone’s death
Worried about making the right choices
Unsure what the person who left you the money would want
Stressed by the sudden responsibility

Many financial experts suggest waiting before making big money decisions. Consider talking to both a counselor and a money professional during this time.

First Things to Do After Getting an Inheritance

Before you start spending or investing, take these important first steps:

1. Get Your Paperwork in Order

Collect all documents about your inheritance:

Will or trust papers
Estate tax forms
Property titles
Insurance policies
Statements from inherited retirement accounts or investments

2. Build Your Support Team

Most inheritances need help from several experts:

Money advisor: To review your current money situation and plan for using inherited assets
Tax expert: To help with possible tax issues
Estate lawyer: To handle legal questions, especially with complicated assets

3. Put Your Money Somewhere Safe (For Now)

While figuring out your long-term plan, keep inherited money in secure, available accounts like:

High-yield savings accounts
Money market accounts
Short-term CDs
Treasury bills

J.P. Morgan Wealth Management advises: “Until you’re certain about your next steps, it’s often wise to park your inheritance in safe, liquid accounts. This gives you time to think through decisions without risking the principal or making choices you might regret.”

4. Know What You’ve Inherited

Different types of assets come with different rules and tax situations:

Cash: The most flexible inheritance
Property: You’ll need to decide whether to keep, rent, or sell
Retirement accounts: These have specific withdrawal rules and tax consequences
Life insurance money: Usually tax-free but you’ll need to decide how to use it
Business interests: May need special valuation and management decisions

Common Mistakes People Make With Inheritances

Many people who inherit money make costly errors early on. Watch out for these pitfalls:

1. Rushing Into Decisions

Making choices while grieving often leads to regrets. Most money experts suggest waiting 6-12 months before making major money moves with inherited funds.

2. Spending Without Planning

Without clear priorities, inheritance money can disappear quickly. Studies show many people spend their entire inheritance within just two years.

3. Keeping the Same Investment Mix

Your comfort with risk and money goals probably differ from the person who left you the money. The investment portfolio you inherited likely needs adjusting to fit your situation.

4. Missing Tax Issues

Inheritances can trigger various taxes:

Estate taxes: Usually paid by the estate before you get your share
Income taxes: May apply to certain inherited assets, especially retirement accounts
Capital gains taxes: May apply when you sell assets that have increased in value
State inheritance taxes: Some states charge these

5. Not Updating Your Own Will or Trust

Getting a big inheritance means you should review your own estate plans to reflect your new financial picture.

Smart Ways to Handle Your Inheritance

After you’ve had time to process your feelings and understand what you’ve inherited, consider these approaches:

1. Pay Off High-Interest Debts

Using inheritance to eliminate debts with interest rates above 5-6% gives you an immediate return on your money.

2. Build or Boost Your Emergency Fund

Financial pros suggest keeping 3-6 months of basic living costs in accounts you can access quickly.

3. Fund Important Life Goals

Think about putting portions of your inheritance toward:

Retirement accounts (maximizing tax advantages)
College funds for kids or grandkids
Home down payment
Starting a business

4. Create a Sound Investment Plan

Work with a money advisor to develop an investment approach that:

Matches your comfort with risk
Fits your timeline for various goals
Spreads money across different types of investments
Minimizes taxes
Considers ethical investing if that matters to you

5. Honor the Person Who Left You the Money

Many people find meaning in using some of their inheritance to honor their loved one’s memory. This could include:

Donations to causes they cared about
Starting a family foundation or donor-advised fund
Helping family members with education
Creating a scholarship in their name

When to Think About Getting Professional Help

Larger inheritances often benefit from professional money management, especially in these situations:

Mixed types of assets: When inheriting various assets including business interests, real estate, and investments
Complicated taxes: When inheritance tax planning requires advanced strategies
Family issues: When dealing with shared inheritances with brothers, sisters, or other relatives
Big money change: When the inheritance dramatically changes your financial situation

A wealth manager does more than basic investment advice—they can help with tax strategies, estate planning, charitable giving approaches, and working with your other financial experts.

Special Rules for Inherited Retirement Accounts

Inheriting retirement accounts comes with specific rules:

Spouses can roll the inherited IRA into their own IRA
Non-spouse beneficiaries usually must withdraw all money within 10 years (with some exceptions)
Required Minimum Distributions (RMDs) may apply depending on your relationship to the deceased and when they passed away
Tax results differ between traditional and Roth inherited IRAs

Because of the complexity and potential tax hits, talking with a financial advisor who knows retirement accounts is especially important when inheriting IRAs.

Creating Your Inheritance Approach

A good inheritance plan addresses immediate needs, long-term security, and honoring the person who left you the money. Consider these percentages as a starting point:

10% for current needs: Allow yourself a reasonable amount for present needs or meaningful purchases
20% for paying down debt: Eliminate high-interest obligations that eat away at your money
50% for long-term security: Invest for retirement and other important future goals
10% for education: Fund learning opportunities for yourself or family members
10% for giving back: Honor the person who left you the money through meaningful contributions

Adjust these percentages based on your particular situation, how much debt you have, and your financial goals.

Finding the Right Financial Help

Not all financial advisors have experience with inheritances. When looking for professional guidance, find advisors who:

Have specific experience handling inheritances and estate planning
Hold relevant credentials (CFP®, CFA, etc.)
Act as a fiduciary (legally required to put your interests first)
Clearly explain how they charge for services
Show understanding for the emotional side of inheritances

The right advisor will help you both make the most of your inheritance financially and find meaningful ways to honor the gift you’ve received.

Moving Forward

Inheritance planning is about creating financial security while honoring important relationships. By taking a careful, step-by-step approach to managing your windfall, you can use an inheritance to build a stronger financial future and honor your loved one’s memory.

Want more help managing your money? Check out our related articles:

FAQs

What if I don’t need the inheritance money right now?

If you don’t have immediate needs for the funds, consider creating a long-term investment strategy. Options include:

Maxing out contributions to your own retirement accounts
Establishing a diversified investment portfolio aligned with your goals and time horizon
Creating an education fund for children or grandchildren
Setting up a donor-advised fund for charitable giving
Paying off high-interest debt to free up your monthly cash flow

Can I disclaim (refuse) an inheritance?

Yes, you can disclaim or refuse all or part of an inheritance, which allows the assets to pass to the next beneficiary in line. This might make sense in certain tax situations or if you’re financially stable and want to direct the assets to someone who needs them more. However, specific rules apply:

You must generally make this decision within 9 months of the death
You cannot have accepted or used any part of the inheritance
You cannot direct who receives the disclaimed assets (they pass according to the will or applicable laws)

How do I find a financial advisor who specializes in inheritance planning?

Look for advisors with specific experience in inheritance and estate planning who hold relevant credentials (like CFP® or CFA). Ask potential advisors about their experience with situations similar to yours, how they’re compensated, and whether they act as a fiduciary. Personal recommendations from friends, family, or other professionals (like attorneys or CPAs) can also be valuable in finding a trustworthy advisor.