What to Do With an Inheritance: Smart Financial Advice & Planning
Have you recently become the beneficiary of an inheritance? It might feel like something right out of a movie—an unexpected windfall, perhaps accompanied by other surprises. But for many people, this is a real-life situation that often comes out of the blue. Receiving an inheritance can stir up a mix of emotions, from gratitude to confusion, especially if you’re not used to managing financial decisions. You may find yourself wondering, “What should I do with this money? Should I spend it on something I need, invest it, or save it for later?”
Surprisingly, inheritances aren’t as rare as you might think. According to the Federal Reserve, the average inheritance in the U.S. is $46,200. While that’s a helpful amount, it’s unlikely to change someone’s life completely. On the other hand, for wealthier families, inheritances can be much higher—often reaching hundreds of thousands or even millions of dollars.
Whether your inheritance is modest or significant, it’s crucial to make thoughtful decisions. Doing so can protect your financial future and honor the memory of the loved one who left you this gift.
What is an inheritance and its types?
Inheritance refers to the money, property, or belongings passed down to someone after a loved one passes away, like money, property, or belongings. It’s often considered a final, meaningful gift, distributed according to a legal document such as a will or trust. Here’s a quick look at the common types of assets you might inherit and how to manage them:
Cash
Cash is the easiest to manage. You might receive a lump sum that can be deposited in your bank account. Though simple, it’s important to think about how to use it wisely—whether for saving, paying off debt, or investing.
Investments (Stocks and Bonds)
You could inherit things like stocks or bonds. You’ll need to decide whether to keep or sell them. Keep in mind there may be taxes to pay if you sell these assets.
Real Estate
This could be a house, land, or rental property. You can choose to live in it, rent it out, or sell it. Each option has its own challenges, like paying taxes, keeping up with maintenance, or understanding the real estate market.
Retirement Accounts
If you inherit a 401(k) or IRA, there are special rules to follow. Traditional accounts may require you to pay taxes when withdrawing money, while Roth accounts often don’t. Some accounts also need to be emptied within a certain time.
Personal Belongings
These might include valuables like jewelry, heirlooms, or collectibles. Some things will have sentimental value, but it’s still important to know their actual worth. This could matter for insurance or if you decide to sell them.
A Business
If you inherit a business or part of one, you’ll need to figure out what to do with it. You might choose to run it, sell it, or hire someone to manage it for you. Each option could require expert help to make the right decision.
What Happens When You Inherit Money?
Getting an inheritance can be a big deal, but it often comes with mixed emotions. You might feel grateful for the gift but also overwhelmed or unsure about what to do next. Since it usually happens after losing someone, there’s also grief involved. Whether you get a lot or a little, knowing how to handle it is important.
What Happens Right Away
Here’s what usually happens when you inherit money or assets:
- When you inherit assets, you’ll hear from the executor, who is the person responsible for handling the estate. This might be a lawyer, a family member, or someone the court assigns, and they will explain what you are set to receive.
- Legal processes, like probate, might delay access to your inheritance. Probate is a court procedure used to verify the will and distribute the assets properly, and it can take weeks, months, or even longer in some cases.
- Some inheritances come with tax obligations, depending on what you receive and where you live. For example, property or investments might require you to follow specific tax rules, and you could face additional costs when selling these assets.
You might also face pressure from family or feel unsure about how to spend or save the money. These emotions are normal but can affect how you make decisions.
The Biggest Mistake to Avoid
The worst thing you can do is rush into decisions. Spending the money too quickly or making bad investments without thinking it through is a common mistake. Many people end up using their entire inheritance within a few years and miss the chance to use it wisely. That’s why taking your time and learning from financial experts is so important.
What to Do When You Get an Inheritance
To make the most of what you inherit, follow these steps:
Take Your Time
Don’t feel like you have to act right away. Give yourself space to process the situation and avoid making big decisions while grieving.
Learn What You Received
Understand exactly what your inheritance includes. Is it all cash? Does it include property, investments, or other assets? Find out if there are debts tied to any of it, like a mortgage on a house.
Pay Off High-Interest Debt
If you owe money on credit cards or other loans with high-interest rates, consider paying those off first. It can save you money over time.
Talk to Experts
Get advice from professionals like financial advisors, tax experts, or estate planners. They can guide you on how to manage the money, avoid tax problems, and create a solid plan.
Build Savings
Use some of the money to create an emergency fund if you don’t already have one. Aim to save enough to cover 3–6 months of living expenses.
Invest for the Future
If possible, put part of the money into investments, like stocks or a retirement fund, to help it grow over time.
Plan Ahead
Think about your long-term goals. Do you want to save for a house, go back to school, or start a business? Use the money in ways that help you achieve these goals.
Set Spending Limits
It’s fine to enjoy some of the inheritance, but don’t spend it all on luxuries. For example, treat yourself to something small, but set limits to make sure you have
money left for important needs.
Look Out for Taxes
Depending on where you live and the kind of assets you get, you might have to pay taxes. For example, selling inherited stocks or property can trigger taxes. Always factor these into your plans.
Respect the Gift
Think about what the person who left you the inheritance wanted for you. Use the money to create stability or honor their memory in a meaningful way.
Making the Most of Your Inheritance
Managing an inheritance isn’t a one-size-fits-all process. Each type of asset comes with its own challenges. Cash may be the easiest to handle, but assets like real estate, investments, or retirement accounts often demand more careful planning. Whether you’re sorting out tax implications, deciding to sell or keep property, or managing a family business, the right approach depends on the specifics of what you’ve inherited.
This is why it’s so important to evaluate every asset with care. Seeking help from professionals, like financial advisors or estate attorneys, can guide you through the process and help you make informed decisions. With the right support, you can protect and grow what you’ve inherited while ensuring it aligns with your goals. Most importantly, managing your inheritance wisely allows you to honor your loved one’s wishes and make their final gift truly meaningful.
