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Receiving an inheritance can feel like winning the lottery. All of a sudden, there’s a significant lump sum of money, and the excitement is overwhelming.
But without a clear plan, that rush of emotion can lead to impulsive decisions that can alter financial trajectories and erode newfound wealth.
One of the most common mistakes heirs make after a financial windfall is immediately spending before planning. Large purchases, such as a new home or car, lifestyle upgrades, even generous financial gifts, tend to happen before the long-term impacts are fully considered.
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An inheritance is not “extra money.” It represents a transfer of responsibility, and treating it as a windfall rather than a long-term asset can lead to unintended, irreversible consequences.
Don’t make decisions just yet
Before making any decisions or purchases, consider taking a pause. A helpful rule of thumb is to wait six to 12 months before spending or investing inheritance. During that time, funds can be placed into a secure, liquid account while emotions settle and until a clear strategy has been developed.
While it takes discipline, allowing time for both emotional and financial clarity will help ensure the inheritance supports long-term goals instead of disrupting them.
While taking a pause is a great way to mitigate impulsive spending and decision-making, it can also carry its own set of risks. Inflation can silently drain purchasing power, especially when large sums remain in low-yield accounts for long periods.
What may feel like a conservative decision now can unintentionally limit long-term growth and flexibility. A disciplined plan evaluates how much should remain liquid for short-term needs and how much can be positioned for long-term growth.
Tax implications
Understanding how an inheritance will be taxed is another common area where costly mistakes happen. Not all inheritances are treated the same under the tax code, and making mistakes can significantly reduce what is left.
For example, regular assets such as stocks, real estate and brokerage accounts often get a tax reset, or a step-up in basis. In other words, the IRS resets the cost basis of the asset to its value on the date of the original owner’s death.
To put this into perspective, imagine your father bought stock for $10,000. At the time of his death, it was valued at $100,000. Taxes would not be owed on the $90,000 growth that happened over his lifetime. Instead, the new basis becomes $100,000. So, if you sell the stock for $105,000, you would only pay taxes on the $5,000 gain.
Retirement accounts, such as traditional IRAs or 401(k)s, are treated differently. Instead, they’re generally taxable when money is withdrawn. Under current rules, most non-spouse beneficiaries must withdraw the funds within 10 years. The withdrawals are also taxed as ordinary income.
For example, if you were to inherit a $400,000 traditional IRA, that money is not tax-free. It becomes taxable as distributions are taken. If it’s withdrawn all at once, you’ll likely be pushed into a higher tax bracket.
The 30-60-90-day approach
For those who are unsure of where to begin, a simple 30-60-90-day approach can be helpful.
- In the first 30 days, secure the inheritance in a safe, liquid account
- Over the next 30 days, meet with a financial expert to review tax considerations, debt obligations and long-term goals
- By 90 days, establish a comprehensive plan that balances liquidity, growth, risk management and estate planning updates
While an inheritance can significantly improve finances, it represents much more than a financial gain — and it doesn’t come without responsibility. With patience, discipline and intentional planning, inheritance can become a foundation for long-term stability and legacy.
