What Should You Do With Your Inheritance?

Receiving an inheritance is a significant financial event. This influx of assets presents an opportunity to strengthen one’s financial standing and pursue life goals. Thoughtful management of these funds maximizes their benefit and aligns them with individual objectives.

Initial Assessment and Immediate Steps

Upon learning of an inheritance, take initial actions before making major financial commitments. Verify the assets, their value, and the legal process. This includes confirming the types of assets inherited, from cash and investments to real estate or other properties.

Secure inherited assets immediately. Deposit checks promptly, initiate title changes for real estate, and ensure physical assets are safe. Gather all relevant documentation, such as death certificates, trust documents, and appraisal reports for non-cash assets, for record-keeping and future transactions.

Avoid making hasty decisions about spending or investing inherited funds. Taking time to process the new financial reality allows for a measured and strategic approach. This reflection can prevent impulsive choices that might not align with long-term financial well-being. Seeking an initial consultation with an estate attorney or a financial advisor can provide guidance during this preliminary phase.

Understanding Tax Implications

Understanding the tax considerations related to an inheritance is important. The federal estate tax is levied on the deceased’s estate, not directly on the beneficiary. For 2025, the federal estate tax basic exclusion amount is $13.99 million per individual. Only estates exceeding this threshold are subject to the tax on the portion above the limit. Some states also impose their own estate or inheritance taxes, with varying rates and exemption amounts.

The inheritance itself is not considered taxable income to the beneficiary at the federal level. However, any income generated by inherited assets after receipt, such as interest, dividends, or rental income, is subject to income tax. When inherited assets like stocks or real estate are sold, capital gains tax may apply. The “step-up in basis” rule adjusts the asset’s cost basis to its fair market value on the date of death, which can reduce or eliminate capital gains tax if sold shortly after inheritance.

Inherited retirement accounts, such as IRAs and 401(k)s, have specific tax rules. Non-spouse beneficiaries inheriting these accounts on or after January 1, 2020, are subject to the 10-year rule, requiring the account to be fully depleted by the end of the tenth year following the original owner’s death. Many non-spouse beneficiaries must take annual required minimum distributions (RMDs) during this period if the original owner had begun RMDs.

Spouses have more flexible options, including treating the inherited IRA as their own or stretching distributions over their lifetime. Distributions from traditional inherited retirement accounts are taxed as ordinary income. Consult a qualified tax professional to navigate inheritance taxation.

Strategic Allocation for Financial Goals

After addressing immediate steps and tax implications, strategically allocate an inheritance to support financial goals. Prioritize high-interest debt, such as credit card balances or personal loans. Eliminating these debts frees up cash flow and reduces ongoing interest expenses.

Establish or fortify an emergency fund. A robust emergency fund, covering three to six months of essential living expenses, provides a financial safety net for unexpected events. This fund helps prevent incurring new debt or liquidating long-term investments during unforeseen circumstances.

For long-term growth, direct a portion of the inheritance towards diversified investment portfolios. These may include mutual funds, exchange-traded funds (ETFs), or index funds, which offer broad market exposure. Select investment vehicles that align with your risk tolerance and time horizon.

Boost retirement savings. Contributing to retirement accounts like IRAs or 401(k)s leverages tax-advantaged growth and compounding. An inheritance can accelerate progress toward retirement goals, potentially allowing for earlier retirement or a more comfortable financial future.

Fund education for yourself or dependents. Options such as 529 plans or other educational savings accounts provide tax advantages while saving for future expenses. This strategic use can alleviate student loan burdens or enable access to higher education.

An inheritance can facilitate major life goals, such as a home down payment or business capital. These investments enhance financial stability and contribute to personal and professional development. Engage a professional financial advisor to create a personalized plan integrating these goals into a comprehensive financial strategy.

Utilizing Funds for Personal and Philanthropic Endeavors

Beyond financial planning and investment, an inheritance offers opportunities for personal enrichment and philanthropy. Allocate a portion for meaningful spending to enhance quality of life. This might include travel, personal development, or purchases that improve daily living.

Consider lifestyle enhancements, such as home improvements or a new vehicle. Approach these acquisitions with a balanced perspective, ensuring they align with financial health rather than impulsive splurging. The aim is to make choices that provide lasting value and contribute to well-being.

Support family members by gifting funds directly, assisting with educational expenses, or helping reduce their debts. Establish clear guidelines and understand any gift tax implications, though annual gift tax exclusion amounts allow for substantial tax-free gifts.

Charitable giving creates a lasting impact and honors personal values. Direct donations to favored causes are an option. Structured approaches like donor-advised funds (DAFs) offer flexibility and potential tax benefits.

A DAF allows an immediate tax deduction when contributions are made, with grants to charities occurring over time. This strategy streamlines charitable efforts and can involve future generations in philanthropic decisions. Directing funds towards personal fulfillment and charitable causes leaves a meaningful legacy.