Client Resources


Guide to Inheritance Management

Written by: Daniel Gleich

Most inheritances are highly emotional for many reasons. Having this money means that someone you love or care about has died, so you're likely to have an emotional tie to that money. You also don't want to disrespect the person who left it to you by wasting it. Coming into unexpected money also carries its own stressors. No matter how good someone is at money management, a windfall like an inheritance comes with challenges.

Make a Financial Plan

It's very easy to fall into emotional spending. For people dealing with more money than they've ever had at one time before, it's also easy to overestimate what it's possible to do with the money. That's why it's vital that before spending any of the inheritance money, you should make a plan detailing exactly how the money will be spent. Simply making a list of everything that could be done with the money is often a great place to start. Next, start prioritizing goals. Different people have different goals and are at different points in their financial life. Someone who inherits money before they purchase their own house is going to have different goals than someone who inherits as they are preparing to downsize their family home in preparation for retirement. A plan makes sure that the money goes toward achieving maximum financial stability and reaching personal financial goals.

Discuss With an Accountant

It's a good idea to get help with making a financial plan to handle an inheritance. There are many reasons to seek out an accountant. Many inheritances aren't just straight cash: There may be bank accounts, retirement accounts, investment accounts, and real estate all incorporated in the estate. Retirement accounts can be especially tricky, as you'll need to understand the best way to either liquidate them or include them in the retirement investments of the person who inherited the account. An accountant can also help understand what taxes the inheritance is subject to and how to best handle and minimize that tax burden.

Paying Off Outstanding Debts

Paying off debts is a great use for an inheritance. Credit card debt in particular tends to cost a lot in terms of interest payments, and using some inherited money to pay that off frees the person who inherited the money to save or invest the money that was going toward credit card fees. Experts differ on if inherited money should go toward paying off lower-interest loans, like mortgages. It depends on the goals of the person and the interest rate of the mortgage. Those with high mortgage rates probably should pay them off, but if the interest rate is lower than the current rate of inflation, it makes less financial sense to pay off that debt with inherited funds that could be used in other ways.

Investing Your Inheritance

The best investment advice regarding an inheritance is that you shouldn't rush any decisions. Being intentional with investments is better for both your emotional health and your long-term financial health. Some people want to keep the money they inherited separate from their other money. However, there is no real reason to do this. It's better to consider how to invest the money when looking at the total financial picture of the person who inherited it. For example, it might make sense for a lot of people to use the money to be able to max out their 401(k)s and IRAs. People who aren't currently contributing money to their 401(k) to get the maximum match their employer offers should use the inherited funds to start doing this immediately. After all, that match represents a guaranteed return on the investment. It's also probably a good idea not to invest all of an inheritance at once. Using investment strategies like value or dollar-cost averaging helps ensure that an inheritance won't be destroyed by buying at the wrong time.

Inherited Assets and Taxation

The good news is that federal estate taxes are only charged against estates valued at more than $12 million. State taxes might have lower thresholds, but typically, the estate pays these taxes, not the inheritors. However, some individual assets are more complicated when it comes to taxes. For example, people who inherit securities might be subject to capital gains taxes when they sell them. It's important for this reason that the value of those securities on the day they were inherited is recorded and kept. That information will be needed when they are sold. Inherited retirement accounts are also more complicated. People who inherit a traditional IRA are subject to taxes on the withdrawals from the account, just like they would be when making withdrawals from their own traditional IRA. Roth IRAs aren't subject to taxes, but within five years, that account must be emptied and closed.

Spending Inheritance Money Wisely

Almost everyone has dreams about what they would do with a large sum of money. They'd help their loved ones. They'd start a business. They'd renovate their house. Or they'd buy their dream car. These are all understandable impulses, but they are also ways that an inheritance can be spent that won't help you achieve long-term financial stability. It's OK to splurge a little, but make sure to put most of it toward a healthy financial future.

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