Key Steps to Take After Receiving an Inheritance

By: Brian Seay, CFA

Receiving an inheritance can be both a blessing and a challenge. It often comes during a time of loss, adding emotional weight to financial decisions. While it might be tempting to make quick decisions, it's crucial to take a measured approach to ensure that this newfound wealth is managed wisely. Here are 7 key steps to take after receiving an inheritance.

1. Pause and Reflect:

The first step is to take a moment to process the emotional aspect of your inheritance. It's important not to rush into financial decisions while you're still grieving. Allow yourself some time to reflect and consider the best ways to steward the assets you received while honoring the legacy of your loved one. Afterall, that’s why they left you the money!

Additionally, it’s crucial that you begin to plan for taxes and investing before you start moving money around. Once you withdraw assets or start investing, your options may be more limited.

2. Understand the Nature of the Inheritance:

Inheritances can come in various forms, including cash, real estate, stocks, bonds, or personal property. Those assets may be in traditional bank accounts, trusts or even retirement accounts like 401ks or IRAs. Each type has its own set of considerations and potential tax implications.

One common mistake is not understanding that taxes may be owed on the funds inside a retirement account or trust. There also may be restrictions on how the assets can be used

We recommend working with an estate attorney, tax or other financial advisor to understand exactly what you've inherited, and any tax or legal implications.

3. Update Your Estate Plan:

Often, an inheritance significantly changes your own financial situation. Your current Will and other estate planning documents may not reflect what you would do now with your inherited assets. Consider working with a professional to update your estate plan. This step helps protect your assets and ensures that your own legacy is managed according to your preferences.

4. Consider the Best Investment You Can Make (Yourself):

It might be easy to skip straight to investing your new assets in the market or spending on new items. Neither of those are necessarily bad. However, think about the most important investments you can make in your future.  Here are a few things to think about:

• Paying Off Debt: Eliminating debt can provide financial relief and improve your overall financial health. Focus on paying off credit card debt, personal loans, or any other high-interest obligations.

• Establish an Emergency Fund: This is especially true if you have been using high-interest debt to cover unexpected expenses. An emergency fund is crucial for financial security. Set aside enough money to cover three to six months' worth of living expenses. This fund will act as a safety net for unexpected expenses or financial emergencies.

• Going Back to School: Your assets might allow you to take classes, earn a certification or change careers. The returns may pay off many times over in higher future income.

• Buying Real Estate: It may be wise to use some of your lump sum as a downpayment on a property that will continue to produce cash flow over the long term.

6. Invest Wisely:

Depending on your financial goals and risk tolerance, consider investing a portion of your inheritance. Diversify your investments across different assets like stocks, bonds and real estate to manage risk and maximize returns. A financial advisor can help you create a portfolio that aligns with your long-term objectives.

7. Plan for Taxes:

Inheritances can come with tax implications, including estate taxes, inheritance taxes, and capital gains taxes. Work with a tax advisor to understand your tax obligations and explore strategies to minimize your tax burden.

Next Steps:

Receiving an inheritance is a significant event that requires thoughtful consideration and strategic planning. By taking these steps, you can honor your loved one's legacy while securing your financial future. Remember to seek professional advice and take your time to make informed decisions that will benefit you and your family in the long run.

Whether you’re about to receive an inheritance or already managing one, we are here to help you answer questions and make a plan. For more insights on investing wisely, reducing taxes and planning for your future, read our Perspectives blogs, listen to the Capital Stewards Podcast or follow us on Linkedin. If you are ready to have a conversation with a professional,  you can start a conversation with us anytime.