Receiving an inheritance is often a deeply emotional experience, blending grief with a new and significant financial responsibility. The immediate question for many is, what to do with an inheritance? The decisions made in the first few months can have a lasting impact on your financial future, making it a moment that calls for pause and careful planning, not hasty action. Rushing into financial commitments can lead to costly mistakes, while a deliberate, thoughtful approach can transform this legacy into a powerful tool for achieving long-term security and personal goals.
This guide provides a comprehensive roadmap designed for individuals and families managing a significant influx of assets. We will outline ten strategic and actionable steps to help you honor the legacy you've received while building a stronger financial foundation. Moving beyond generic advice, this listicle offers detailed insights to help you make informed choices that align with your unique circumstances.
From assembling a team of professional advisors and strategically eliminating high-interest debt to optimizing your tax position and establishing a philanthropic vision, each step is designed for practical implementation. Whether your goal is to secure your retirement, invest in real estate, fund education, or create your own estate plan, you will find clear, actionable guidance. Our goal is to empower you to navigate this pivotal moment with confidence and clarity, ensuring the inheritance serves as a lasting benefit for you and future generations.
1. Consult with a Financial Advisor or Wealth Manager
Receiving an inheritance, whether expected or sudden, can be an emotionally charged and financially complex event. Before making any significant decisions, one of the most prudent first steps is to seek professional guidance. A qualified financial advisor or wealth manager provides a crucial, objective perspective, helping you navigate the complexities and make choices that honor the legacy you've received while securing your own financial future. This step ensures you create a comprehensive strategy before allocating funds.
This professional can help you understand the immediate tax implications, such as inheritance or estate taxes that may apply, and develop a long-term plan. They will work with you to integrate this new capital into your existing financial picture, ensuring it aligns with your goals, whether that’s early retirement, funding education, or philanthropic pursuits.
Why This is a Critical First Step
A significant influx of cash can lead to impulsive decisions. An advisor acts as a strategic buffer, encouraging a thoughtful approach rather than a reactive one. They can help you model different scenarios, illustrating the long-term impact of paying off a mortgage versus investing, for example.
Actionable Tips for Finding the Right Advisor:
- Seek Fiduciary Duty: Prioritize advisors who operate under a fiduciary standard. This legally obligates them to act in your best interest. Ask directly about their fee structure, whether it's fee-only, fee-based, or commission-based.
- Verify Credentials: Look for designations like Certified Financial Planner (CFP®), which indicates rigorous training in comprehensive financial planning.
- Conduct Interviews: Don't settle for the first advisor you meet. Interview at least three different professionals to compare their philosophies, communication styles, and expertise.
Choosing the right partner is essential for successfully managing what to do with an inheritance. To help you in your search, it is important to understand what to look for in a financial advisor before making a commitment. This initial consultation sets the foundation for every other decision you will make with your inheritance.
2. Pay Off High-Interest Debt
Receiving a financial windfall offers a powerful opportunity to reset your financial foundation, and one of the most effective ways to do this is by eliminating high-interest debt. Using a portion of your inheritance to pay off liabilities like credit card balances, personal loans, or high-rate auto loans provides an immediate and guaranteed return on your money. The interest you save by eliminating this debt is often far greater than the potential gains from conservative investments, providing instant financial relief and freeing up future cash flow.
This strategic move is less about just clearing balances and more about making a smart financial decision. For example, paying off a $20,000 credit card balance with an 18% APR saves you $3,600 in interest payments in the first year alone. This is a risk-free return that would be very difficult to achieve in the stock market. In contrast, it may not make sense to aggressively pay down a mortgage at 3% or student loans at 2%, as the funds could potentially generate higher returns through strategic investing.
Why This is a Critical Use of Funds
High-interest debt acts as a significant drag on your ability to build wealth. The compounding interest works against you, making it difficult to get ahead financially. Eliminating this burden is a key step when considering what to do with an inheritance because it immediately improves your net worth and reduces your monthly financial obligations. This new financial freedom allows you to redirect funds that were once servicing debt toward savings, investments, or other wealth-building goals.
Actionable Tips for Debt Repayment:
- Prioritize by Interest Rate: List all your debts and organize them from the highest interest rate to the lowest. Focus on eliminating the most expensive debt first, a method often called the "debt avalanche."
- Request Payoff Statements: Contact each creditor to get an official payoff amount. This figure includes any accrued interest and ensures the account is closed in full.
- Redirect Your Payments: Once a debt is paid off, don't absorb the old monthly payment into your spending. Instead, automate a transfer of that same amount into a high-yield savings account or an investment portfolio to continue building momentum.
- Avoid New Debt: Create a budget to ensure you don't fall back into the habit of accumulating high-interest debt after using your inheritance to clear it.
3. Establish an Emergency Fund
Before allocating your inheritance to long-term investments or significant purchases, the most foundational step you can take is to build a robust financial safety net. An emergency fund is a liquid savings account reserved strictly for unexpected life events, such as a job loss, medical crisis, or urgent home repair. Using a portion of your inheritance to create or fully fund this account provides immediate security and prevents the need to disrupt your long-term financial strategy when emergencies arise.
This fund acts as a crucial buffer between you and high-interest debt. Without it, a sudden expense might force you to rely on credit cards or, even worse, liquidate investments at an inopportune time, potentially incurring losses and tax penalties. Financial experts like Dave Ramsey and Suze Orman have popularized this concept as the cornerstone of personal finance, ensuring you are prepared for financial shocks without derailing your goals.
Why This is a Critical Foundational Step
An inheritance provides a rare opportunity to establish financial stability from a position of strength rather than from scratch. By prioritizing an emergency fund, you are essentially purchasing peace of mind. For example, a person with monthly living expenses of $5,000 should aim for an emergency fund of $15,000 to $30,000. This ensures that a sudden job loss doesn’t immediately create a financial crisis, allowing you to focus on finding a new position without stress.
Actionable Tips for Building Your Fund:
- Choose the Right Account: Open a high-yield savings account (HYSA) separate from your daily checking account. As of 2024, many HYSAs offer competitive Annual Percentage Yields (APYs), allowing your emergency fund to grow while remaining easily accessible.
- Calculate Your Target: Tally your essential monthly living expenses, including housing, utilities, food, and insurance. Aim to save at least three to six months' worth of these expenses. If you are self-employed or have variable income, consider saving up to twelve months.
- Automate and Forget: Set up an automatic transfer from your primary account to your HYSA. Even if the inheritance fully funds it, this practice is beneficial for replenishing it after use.
- Review Annually: Life changes, and so do your expenses. Re-evaluate the size of your emergency fund annually or after major life events like a marriage or a home purchase to ensure it remains adequate.
Building this financial bedrock is one of the wisest first moves when deciding what to do with an inheritance. It honors the legacy you received by using it to create lasting security for yourself and your family, setting a solid foundation for all future financial decisions.
4. Invest in a Diversified Portfolio (Index Funds/ETFs)
Once you have established a financial safety net and addressed high-interest debts, investing your inheritance is a powerful way to build long-term wealth. For many, the most effective and straightforward approach is to invest in a diversified portfolio using low-cost index funds or Exchange-Traded Funds (ETFs). This strategy, championed by legendary investors like Warren Buffett, allows you to capture the growth of the entire market rather than trying to pick individual winning stocks.
This method involves purchasing funds that track major market indexes, such as the S&P 500, which holds the 500 largest U.S. companies. By doing so, you achieve instant diversification across hundreds or even thousands of companies, significantly reducing the risk associated with any single company's poor performance. It’s a foundational strategy for anyone deciding what to do with an inheritance to ensure it grows over time.
Why This is a Prudent Growth Strategy
Attempting to outperform the market is notoriously difficult, even for professional investors. Index fund investing provides a disciplined, low-cost way to participate in economic growth. Because these funds are passively managed, their fees are a fraction of what actively managed funds charge, allowing you to keep more of your returns. This makes it an ideal cornerstone for a long-term financial plan.
Actionable Tips for Smart Investing:
- Choose Low-Cost Providers: Focus on reputable firms known for their low expense ratios, such as Vanguard, Fidelity, or Charles Schwab. A small difference in fees can compound into a significant amount over decades.
- Align with Your Risk Tolerance: Your investment mix should reflect your comfort with market fluctuations and your time horizon. A younger investor might choose a portfolio heavier in stocks (like VTI), while someone nearing retirement may prefer a more conservative mix.
- Consider Dollar-Cost Averaging: If you are nervous about investing a large lump sum at once, you can use dollar-cost averaging. This involves investing smaller, fixed amounts over a set period, which can help mitigate the risk of a market downturn right after you invest.
By building a diversified portfolio, you create a robust engine for wealth creation, transforming your inheritance into a legacy that can support your financial goals for years to come.
5. Contribute to Retirement Accounts (401k, IRA, Roth IRA)
Using a portion of your inheritance to fund tax-advantaged retirement accounts is one of the most powerful strategies for long-term wealth creation. While it may not offer the immediate gratification of a large purchase, this decision leverages the incredible power of compound growth in a tax-sheltered environment. Supercharging your retirement savings ensures that the legacy you received continues to grow, providing financial security for decades to come.
This approach is particularly impactful for younger inheritors who have a long time horizon before retirement. The longer the money can grow untouched, the more dramatic the effects of compounding will be. For example, a one-time $10,000 contribution made at age 30 could potentially grow to over $170,000 by age 65, assuming a 7% average annual return, demonstrating a significant return on a disciplined decision.
Why This is a Critical Wealth-Building Step
An inheritance provides the capital to max out accounts you might otherwise only contribute minimally to. By using these funds, you can hit the annual contribution limits for accounts like a 401(k) ($23,000 in 2024) or an IRA ($7,000 in 2024) without impacting your regular monthly budget. This is a direct investment in your future self, optimizing tax benefits and securing a comfortable retirement.
Actionable Tips for Maximizing Contributions:
- Prioritize Employer Match: If your employer offers a 401(k) match, contribute enough to receive the full amount first. This is an instant, guaranteed return on your investment.
- Choose the Right IRA: Decide between a Traditional IRA (tax-deductible contributions) and a Roth IRA (tax-free withdrawals in retirement) based on your current versus expected future income tax bracket.
- Utilize Catch-Up Contributions: If you are age 50 or older, you can contribute additional amounts. For 2024, this means an extra $7,500 for a 401(k) and $1,000 for an IRA.
- Explore Advanced Strategies: If your income is too high to contribute directly to a Roth IRA, you may be able to use a specific conversion method.
Effectively navigating the rules and income limits for retirement contributions is key. To better understand your options, it's wise to learn more about a backdoor Roth IRA conversion and see if it fits your financial situation. This strategic move can be a cornerstone of what to do with an inheritance for lasting financial benefit.
6. Create or Update Your Own Will and Estate Plan
Receiving an inheritance is a powerful reminder of the importance of legacy and the need for proper planning. This event naturally brings your own mortality and financial succession into focus, making it the perfect time to create or review your own will and estate plan. Taking this step ensures that your assets, including your newly acquired inheritance, are distributed according to your wishes, protecting your loved ones from legal complexities and potential disputes down the line.
An estate plan is more than just a will; it's a comprehensive strategy that includes designating beneficiaries for your retirement accounts, establishing powers of attorney for financial and healthcare decisions, and potentially setting up trusts. Without these legal instruments in place, your assets will be distributed according to state intestacy laws, which may not align with your intentions and can cause significant delays and costs for your heirs.
Why This is a Critical Step for Your Legacy
Thinking about what to do with an inheritance should include planning for its eventual transfer. A well-crafted estate plan minimizes the burden on your family during an already difficult time. For example, a trust can allow assets to pass to your heirs directly, bypassing the often lengthy and public probate process. This provides your beneficiaries with faster access to funds and maintains your family’s financial privacy.
Actionable Tips for Effective Estate Planning:
- Consult a Specialist: To ensure your wishes are clearly documented and legally sound, especially after a significant financial event like an inheritance, consider finding an estate planning attorney. While online services are suitable for simple estates, an attorney is crucial for complex situations involving significant assets, business interests, or blended families.
- Designate Key Roles: Carefully choose an executor for your will, a trustee if you create a trust, and agents for your powers of attorney. These individuals will be responsible for carrying out your wishes, so select people who are trustworthy, organized, and capable.
- Review and Update Regularly: Your estate plan is not a "set it and forget it" document. Review it every three to five years or after any major life event, such as a marriage, divorce, birth of a child, or significant change in assets like receiving an inheritance.
By creating a thorough estate plan, you not only manage your inheritance wisely but also establish a clear and protective legacy for the next generation. A key part of this is understanding the legal mechanisms involved. For more information, you can learn about strategies for avoiding probate court to streamline the process for your heirs.
7. Pay Taxes and Settle Estate Obligations Properly
Navigating the financial responsibilities of an inheritance is as important as deciding how to use the funds. Properly addressing taxes and settling estate obligations is a non-negotiable step that protects the value of your inheritance and ensures legal compliance. While most inheritances are not subject to federal income tax for the beneficiary, a failure to understand the rules can lead to costly mistakes. This process involves ensuring all of the deceased's final debts are paid and all tax filings are accurate and timely.
Understanding concepts like the "stepped-up basis" is crucial. For example, if you inherit stock purchased at $100 per share that is valued at $150 on the date of death, your cost basis becomes $150. You only owe capital gains tax on the growth above $150 when you sell. Additionally, some states impose their own inheritance tax, which is levied on the beneficiary, so it is vital to know the specific laws where the deceased resided.
Why This is a Critical First Step
Ignoring or mishandling tax and estate obligations can result in significant financial penalties, interest charges, and legal complications from the IRS or state tax authorities. It can also delay the final distribution of assets. Taking a proactive and organized approach ensures a smooth transition and preserves the integrity of the estate, allowing you to fully benefit from what you’ve received. A critical part of managing an inheritance is to properly address the tax implications of inherited property, ensuring all obligations are met.
Actionable Tips for Managing Estate Obligations:
- Work with Professionals: Engage a CPA or tax attorney who specializes in estate settlement. They can manage the filing of the deceased's final income tax return (Form 1040) and the estate's income tax return (Form 1041), if required.
- Obtain a "Stepped-Up Basis" Valuation: Ensure you get an official appraisal for assets like real estate or securities as of the date of death. This documentation is essential for minimizing future capital gains taxes.
- Understand State-Level Taxes: Check if the estate is subject to state inheritance or estate taxes. Six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) currently have an inheritance tax.
- Keep Meticulous Records: Retain all documents related to the inheritance, including the will, trust documents, death certificate, and asset valuations, for at least seven years.
8. Invest in Real Estate or Property
For those managing a more substantial inheritance, real estate presents a compelling opportunity to build wealth through tangible assets. Investing in property can provide a steady stream of rental income, long-term appreciation, and valuable tax benefits. This strategy transforms a portion of what to do with an inheritance from liquid cash into a physical asset that can generate returns for years to come, securing a lasting financial legacy.
Whether you purchase a rental property, invest passively in real estate funds, or pay down your primary residence, this approach offers a different risk-and-return profile compared to traditional stock market investments. It allows for diversification and can serve as an effective hedge against inflation, as property values and rental rates often rise with the cost of living.
Why This is a Powerful Wealth-Building Tool
Unlike stocks or bonds, real estate is an asset you can see and touch, which provides a sense of security for many investors. It offers multiple avenues for profit, including cash flow from rent and capital appreciation when the property is sold. For example, a well-chosen rental property can generate a 6-8% annual return on investment, including appreciation, while offering tax deductions for mortgage interest, property taxes, and operating expenses.
Actionable Tips for Real Estate Investing:
- Consider a Passive Approach: For those who want real estate exposure without the responsibilities of being a landlord, Real Estate Investment Trusts (REITs) or real estate crowdfunding platforms offer an excellent alternative. These allow you to invest in a portfolio of properties with professional management.
- Conduct Thorough Due Diligence: If buying a physical property, research local market conditions, tenant demand, and economic trends. A high-demand area with strong job growth is more likely to provide consistent returns and appreciation.
- Calculate True ROI: Your return on investment (ROI) calculation must include all potential expenses. Account for property taxes, insurance, homeowner association fees, routine maintenance, and potential vacancies to get a realistic picture of your net income.
Working with experienced real estate professionals, such as agents and property managers, is crucial for success. For more advanced strategies and educational resources, platforms like BiggerPockets provide a wealth of information for both new and seasoned real estate investors.
9. Invest in Education and Self-Development
While many strategies for what to do with an inheritance focus on traditional assets like stocks or real estate, one of the most powerful investments you can make is in yourself. Using a portion of your inheritance for education and professional development can generate a significant return by boosting your lifelong earning potential. This approach transforms a one-time financial gain into a lasting career asset, creating value far beyond the initial sum invested.
This could mean pursuing an advanced degree like an MBA, which can have a lifetime ROI of over 100%, or obtaining specialized certifications (PMP, CPA) that justify higher salaries. It could also involve acquiring high-demand skills through coding bootcamps or data science courses. For those with children, this could be an opportunity to fund their future education through a tax-advantaged 529 plan, securing their path to success.
Why This is a Future-Proof Investment
Investing in your skills is a strategic move that pays dividends indefinitely. Unlike market-dependent assets, the knowledge and credentials you gain become a permanent part of your personal capital. This enhances your career resilience, opens doors to new opportunities, and equips you to navigate economic shifts more effectively.
Actionable Tips for Investing in Yourself:
- Calculate the ROI: Before enrolling in a program, research the average salary increase and career prospects for graduates. Compare the cost of the program to the potential boost in lifetime earnings.
- Explore Cost-Effective Options: Consider high-quality online courses and certifications from platforms like Coursera or edX, which offer flexibility and lower costs than traditional institutions.
- Fund Future Generations: Use the inheritance to establish or fully fund a 529 college savings plan for your children or grandchildren. This provides tax-free growth and withdrawals for qualified educational expenses.
Investing in human capital is a profound way to honor a legacy, turning financial support into a catalyst for personal and professional growth. When deciding how to invest your inheritance, placing a bet on yourself often yields the most rewarding returns. This strategic use of funds builds a foundation for long-term security and fulfillment.
10. Establish Charitable Giving and Philanthropic Goals
An inheritance provides a unique opportunity to create a meaningful legacy that extends beyond your own financial security. Using a portion of these funds for philanthropy allows you to support causes you are passionate about, honor the memory of the person who left you the inheritance, and create a lasting positive impact. This approach not only provides personal fulfillment but can also offer significant tax advantages when structured correctly.
Strategic charitable giving transforms a financial windfall into a powerful tool for change. Instead of simply writing a check, you can explore sophisticated vehicles like donor-advised funds or charitable trusts. These instruments allow you to maximize your philanthropic impact while potentially reducing your income or estate tax liability, making your generosity both heartfelt and financially savvy.
Why This Creates a Lasting Legacy
Integrating philanthropy into your financial plan is a profound way to define what you stand for. It allows you to align your financial resources with your core values, whether that means supporting education, environmental conservation, or medical research. This decision is a key part of determining what to do with an inheritance for those who wish to leave the world a better place.
Actionable Tips for Effective Giving:
- Define Your Mission: Identify the causes that matter most to you and the person you are honoring. This focus will guide your philanthropic decisions and make your giving more impactful.
- Explore Giving Vehicles: Consider a Donor-Advised Fund (DAF), which allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to your favorite charities over time. For larger sums, a charitable trust may be more appropriate.
- Vet Organizations Thoroughly: Use resources like Charity Navigator or GuideStar to research the financial health, accountability, and transparency of non-profits before donating. Ensure your contribution will be used effectively.
Partnering with a financial advisor who has expertise in philanthropic planning can help you navigate these options. They can help you establish a giving strategy that not only supports your chosen causes but also integrates seamlessly with your overall financial and estate plan, ensuring your legacy of generosity endures.
10 Inheritance Options Comparison
Transforming Your Inheritance into a Lasting Legacy
Receiving an inheritance is a profound moment, often blending the sorrow of loss with the significant responsibility of newfound wealth. It marks the end of one chapter and the beginning of another, presenting a unique opportunity to honor a loved one's memory while securing your own financial future. Throughout this guide, we've explored a comprehensive roadmap for navigating this journey, moving from immediate, foundational steps to long-term, legacy-defining strategies. The core lesson is clear: thoughtful, deliberate action is the key to transforming this gift into a powerful engine for growth and stability.
The initial steps we covered, like engaging a financial advisor, paying off high-interest debt, and building a robust emergency fund, are not merely suggestions; they are the bedrock of a sound financial house. Rushing into major investment decisions without this foundation is like building a skyscraper on sand. By first eliminating the drag of consumer debt and creating a liquid cash reserve, you grant yourself the most valuable asset of all: time. Time to think clearly, to plan without pressure, and to make decisions from a position of strength rather than panic. This measured approach is precisely what helps individuals and families successfully manage a sudden influx of capital.
From Stability to Strategic Growth
Once your financial footing is secure, the conversation shifts from defense to offense. The true potential of your inheritance is unlocked when you strategically deploy it for growth. This involves a multi-pronged approach tailored to your specific risk tolerance, time horizon, and life goals.
We explored several powerful avenues for this:
- Diversified Investing: Utilizing low-cost index funds and ETFs to build a portfolio that captures broad market growth while mitigating single-stock risk.
- Retirement Supercharging: Maximizing contributions to tax-advantaged accounts like 401(k)s and IRAs to harness the incredible power of compound interest over decades.
- Tangible Assets: Venturing into real estate, whether for personal use, rental income, or long-term appreciation, provides an alternative asset class that can hedge against market volatility.
- Personal Capital: Investing in your own education or professional development, an often-overlooked strategy that can yield the highest returns of all by increasing your lifetime earning potential.
Deciding what to do with an inheritance is not about picking one of these options, but about creating a balanced, integrated plan where each component supports the others.
Building a Legacy That Endures
Ultimately, an inheritance is more than just money; it is a transfer of values, hard work, and love from one generation to the next. The final and most impactful decisions you make will reflect this deeper meaning. Crafting your own will and comprehensive estate plan ensures that you can pass on this legacy thoughtfully to your own heirs. Proper tax planning and settling estate obligations are not just legal requirements but acts of responsible stewardship that preserve the full value of the assets you've received.
Furthermore, dedicating a portion of your inheritance to philanthropic causes connects your family’s legacy to the broader community. Establishing a charitable giving strategy, whether through direct donations, a donor-advised fund, or a private foundation, creates a positive impact that can ripple outward for generations. This act of giving transforms financial wealth into a tool for social good, creating a legacy that transcends dollars and cents. Your inheritance becomes a story of not only what you built for yourself, but what you contributed to the world. It is the ultimate expression of gratitude for the gift you were given.
Deciding what to do with an inheritance is a complex process with life-altering implications. A fiduciary advisor can provide the objective, expert guidance needed to navigate tax laws, investment opportunities, and estate planning with confidence. At Commons Capital, we specialize in creating personalized wealth management strategies for high-net-worth families, ensuring your inheritance serves as a cornerstone for lasting prosperity and a meaningful legacy. Contact our team to build a comprehensive plan that honors the past while securing your future.
