Receiving an inheritance is often a bittersweet experience. It comes with the grief of losing a loved one and the profound responsibility of stewarding their life’s work. In the midst of this emotional turmoil, you’re faced with significant financial decisions.
Whether the inheritance is large or modest, having a clear, thoughtful plan is the best way to honor your parents memory and use their gift to create a long lasting security for yourself and your family.
Step 1: The Pause Button - What to Do Immediately
Resist the Urge to make any major financial decisions for at least six months to a year. Grief can cloud judgement. Park the money in a safe liquid account like a high yield savings account or money market fund. This gives you time to grieve and think clearly
- Don’t: Quit your job, buy a luxury car, or tell friends and family about the money
- Do: Pay the essential bills related to the estate, if you are the executor. Consult with a tax professional and a fiduciary financial advisor
Step 2: Understand What You’ve Inherited
Not all the assets are created equal. How you handle them depends on what you received
- Cash: The simplest form. Be mindful of Deposit insurance limits
- Retirement Accounts (IRA, 401(k)): These have complex tax rules and strict withdrawal requirements for non-spouse beneficiaries. The SECURE Act changed the rules, often requiring the account to be drained within 10 years. This is a critical area for professional guidance.
- Brokerage Accounts (Stocks, Bonds): You receive a “Step-Up in Basis.” This means the value of the assets for tax purposes is reset to their value on the date of the original owner’s death. This can dramatically reduce capital gains taxes if you choose to sell them later.
- Business Interests: This adds another layer of complexity. Understanding the business’s value and your role in it is essential
Step 3: Build your Utilization Plan (The Smart Money Strategy)
Once you have clarity you can build a plan that aligns with your values and long term goals. A prudent strategy often follows this order.
1. Secure your Foundation:
- Pay off High-Interest Debt: Using a portion of the inheritance to eliminate credit card debt or personal loans is one of the best guaranteed returns you'll ever get
- Bolster Your Emergency Fund: Ensure you have 6-12 Months of living expenses set aside in a safe account.
2. Invest in your Future:
- Maximize Retirement Accounts: Contribute the maximum to your IRA and 401(k). This uses tax advantaged space to grow the inheritance for your own retirement.
- Invest in a taxable brokerage account: for goals beyond retirement like future education expenses or a second home
3. Fund personal goals:
- College savings for children: Fund or start a 529 plan
- Down Payment on a Home: This can be a wonderful use of funds to build stability
- Invest in Yourself: Consider funding education or a career change that increases your long term earning potential
4. Enjoy it (responsibly)
- Its okay to use a small predetermined portion for something meaningful. A family trip, a needed home renovation, or a donation to a charity your parent loved. This can be a healthy way to honor them without derailing your financial plan.
Step 4: Assemble your Professional Team
You don’t have to navigate this alone. Your team should include:
- A Fiduciary Financial Advisor: They are legally obligated to act in your best interest. They can help you create a comprehensive financial situation.
- An Estate Attorney: To help with the probate process and update your own will and trusts now that your financial situation has changed.
- A CPA or Tax Advisor: Crucial for understanding the tax implications of Inherited IRA’s, selling Property, and other complex transactions
The Bottom Line:
AN Inheritance is more than money. It’s a legacy. The most respectful thing you can do is handle it with care, wisdom and foresight. By pausing, planning, and seeking expert advice, you can transform this gift into lasting financial security and a testament to your parents love.
At SWAN Wealth Management Group we provide compassionate, objective guidance, during life's biggest transitions. We can help you understand your options, navigate tax complexities, and integrate your inheritance into a plan that secures your future and honors your past.