Receiving an inheritance is emotional. Even when it comes from a place of love and generosity, it often arrives during one of the hardest seasons of life.
Once the initial emotions settle, many people suddenly find themselves responsible for decisions they’ve never had to make before.
I’ve seen inheritors make thoughtful, life-changing decisions, and I’ve also seen smart people unintentionally create avoidable issues simply because they moved too quickly or didn’t have a plan.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
That’s especially important to keep in mind as an unprecedented amount of wealth changes hands in the coming years. It is estimated that $105 trillion is expected to flow to heirs through 2048.
The good news is you don’t need to become a financial expert overnight.
Before you start spending, investing, gifting or paying off debt, there are a few things to consider.
1. Don’t rush to make big decisions
A common mistake people make after inheriting money is responding to pressure to “do something.” An inheritance can create emotional urgency. Suddenly, family members have opinions. Friends may offer advice, and even social media might start providing investment-related content.
It can feel like you’re missing out on opportunities or like you’re falling behind if you don’t act quickly.
In reality, slowing down is often the smartest move. In fact, you may not have a choice. Settling an estate is a big task, and if assets are not held in a trust, they will likely go through probate, which can take months and sometimes even years.
Take this time to create a plan. Think through some of your short-term and long-term financial goals, whether that’s paying down debt, saving for retirement or even taking a vacation.
If the money is sitting in cash, in a bank account or a brokerage account, I suggest temporarily putting it into a high-yield savings account or a money market fund while you process your options. Remember, you don’t need an instant solution.
2. Understand what you actually inherited
Give yourself time to begin gathering important documents and account statements for the assets you inherited. Not all inherited assets should be looked at the same way.
For example, an inherited IRA comes with distribution rules and potential tax consequences, while a taxable brokerage account may receive a step-up in cost basis, which can significantly reduce capital gains taxes. Real estate may come with maintenance costs, property taxes, and/or tenants and rental agreements.
Before making withdrawals or liquidating investments, it’s important to understand the type of account, how it’s titled and what rules apply. A single uninformed decision can create a large surprise tax bill.
3. Avoid treating the inheritance like “found” money
Psychologically, inherited money often feels different from earned money. People tend to spend inheritance funds more freely because they don’t associate the money with years of work or sacrifice.
This behavioral bias is called “mental accounting,” where people treat money differently depending on where it came from, even though it should be treated the same.
In fact, a study from ThinkAdvisor (paywall) shows that 42% of inheritors spend their inheritance within a year. That kind of behavior can quietly derail long-term goals.
This doesn’t mean you shouldn’t enjoy any of the inheritance. In many cases, using a portion for meaningful experiences or family memories can be fulfilling, but treating the entire inheritance like found money can lead to lifestyle creep that is difficult to sustain in the long run.
4. Lean on a trusted advisory team
Even knowledgeable inheritors may sometimes feel overwhelmed when dealing with money left to them, because the decisions can be complex. Questions around how certain assets pass, distribution rules around certain types of accounts, property transfers and tax strategies can quickly become more nuanced than people expect.
This is where having a strong advisory team can help make a meaningful difference. That team may include a financial adviser, CPA, estate planning attorney and even an insurance broker or agent.
Having experienced professionals by your side can help you avoid preventable mistakes and identify opportunities you may not know exist.
A good advisory team should help you slow down and think clearly. You don’t have to navigate every financial, legal and emotional decision alone.
5. Create a legacy, one step at a time
This journey is personal and often overwhelming. The financial steps you take now can help bring peace and stability for the years to come, and create a legacy that honors your loved one.
You don’t need to figure it all out in one day, but having a plan and the right team beside you can make all the difference.
