Losing a loved one is never easy, but when you’re also navigating grief, family dynamics, and funeral arrangements, it can be hard to get your bearings, let alone think strategically about an inheritance.
Whether you’ve inherited cash, investments, real estate, a business interest, or an IRA, it’s natural to feel overwhelmed about the decisions ahead. Many people even experience “sudden wealth syndrome,” a term coined by financial professionals to explain the stress, uncertainty, and emotional weight that can come with receiving a significant sum of money. That’s why your best first step is to simply slow down, and take time to seek wise counsel before making major financial decisions.
Key Takeaways
- Don’t rush. Take time before making major financial decisions. You’re going through a lot.
- Understand your assets. Inherited cash, IRAs, investments, real estate, and business interests each have unique rules and tax implications.
- Focus on priorities. Consider paying down high-interest debt, building emergency savings, and supporting long-term financial goals.
- Know the tax consequences. The taxes associated with an inheritance depend on the type of assets you receive.
- Honor the legacy. Use inherited wealth in ways that reflect your loved one’s values and your own financial priorities and values.
- Seek professional guidance. A financial advisor like Anthem Advisors can help you avoid costly mistakes and create a thoughtful inheritance strategy that aligns with your full financial plan.
What Should I Do First After Inheriting Money or Receiving a Windfall?
Answer: Don’t rush into big decisions. When your financial status changes quickly, you may feel tempted to make major purchases or changes to your lifestyle, but moving too quickly could lead to a costly mistake. Even if you want to do something “positive” like gifting money to a family member or paying off debt, it’s important to process the season you’re in. Patience today can help prevent future regrets. In most cases (and unless there is an urgent need), the best initial decision is to hold the cash in a secure account for several months while you develop a thoughtful strategy. Start by:
- Getting a lay of the land. Gather, organize, and understand what accounts, assets, and property you’ve received. Be aware you may receive:
- Cash accounts
- Investment accounts
- Retirement account like IRAs
- Real estate
- Life insurance proceeds
- Business ownership interests
- Digital assets, including cryptocurrency, online and social media accounts, cloud storage, intellectual property, etc.
- Personal property and collectibles
- Doing your research. Review any beneficiary designations and legal documents, and meet with trusted professionals who can help you identify possible opportunities and pitfalls. It’s crucial to note that all inherited assets cannot be treated the same way. They each come with their own rules, opportunities, and potential tax considerations, but a trusted advisor can help you understand the options and considerations involved.
- Catching your breath. Time gives us perspective. Allow yourself time to work through emotions and see your new financial picture more clearly. The wealth may have happened “suddenly” but you can slow the process down.
Big Picture Considerations
At some point, you will begin to allocate the money, but before making any decisions you should also prioritize spending with some of the following considerations:
- High-Interest Debt. Paying off high-interest credit cards or personal loans creates margin and improves your overall financial picture.
- Emergency Savings. It’s always wise to strengthen your financial foundation and pad emergency reserves. Many financial professionals suggest maintaining three to six months of essential living expenses (and debt) in emergency reserves.
- Long-term goals. Inherited or unexpected assets can support retirement planning, education funding, investing, charitable giving, or other long-term objectives that align with your broader financial plan.
What Tax Consequences Come with Receiving an Inheritance?
The number one question associated with a sudden windfall is, “Will I owe taxes on my inheritance?” The answer depends on at least two things: the type of asset and how the inheritance was structured. Here are four of the most common:
Inherited IRAs. These can be especially complex and have changed significantly in recent years. Depending on your relationship to the deceased, how old they were, and the type of retirement account involved, you may be required to withdraw funds within a specific timeframe, called taking required minimum distributions (RMDs). Doing this incorrectly could lead to unexpected tax and penalty implications.
Investment accounts. Inherited investments do not trigger an immediate income tax, but future tax obligations depend heavily on the account type. Inherited assets receive a “stepped-up basis,” which means the asset is reset to its fair market value on the date of the original owner’s death. Because of the step-up, if you sell immediately, you will owe little to no capital gains, but the longer you hold the asset, the more value it gains, and you’ll be taxed on the growth.
Real estate. Similar to investment accounts, inheriting a real estate property does not trigger an immediate federal income tax, but does come with distinct capital gains, property, and sometimes state-level taxes. Inherited properties often receive a step-up in basis too, which can affect future tax liability if the property is sold. Where the property is located, and what you plan to do with it (rent it out, live in it, sell it) also plays a role.
Estate and inheritance Taxes. An “estate tax” is paid by the deceased’s estate before assets are distributed, while an “inheritance tax” is paid by the beneficiary who receives the assets. Most beneficiaries will not face federal estate taxes directly, but rules at the state-level may vary. The complexity associated with large estates, trusts, or business interests often require additional planning.
How Do I Honor My Loved One’s Wishes?
Many people feel a deep sense of responsibility to wisely manage inherited wealth. For those individuals, questions may arise like:
- What would they have wanted me to do with this money? (In some cases you may find their personal recommendations within their estate plan or legacy letter.)
- How can I best use these resources?
- How do I balance honoring their legacy with my own financial needs and values?
If your loved one’s wishes were unclear, you may find it helpful to think about the inheritance they left beyond the financial transaction, and instead, view it as a continuation of the values and stewardship your loved one demonstrated throughout their life. With that focus, you may decide the best way to honor them is to preserve assets for future generations, or invest in opportunities. You may decide to financially support causes they cared about, pay down your family’s financial burdens, or strengthen long-term security. You have a variety of options.
When Should I Talk to a Financial Advisor?
As mentioned above, the best time to connect with a financial advisor like Anthem Advisors is before making any major financial decisions. While an inheritance creates opportunities, it can also bring complexity and emotional stress, in an already challenging season. We can help you understand the opportunities and responsibilities that come with an inheritance and develop a plan that aligns with your goals, values and priorities, by:
- Evaluating tax implications
- Understanding the specific rules associated with your new assets
- Coordinating with attorneys and accountants
- Assessing investment opportunities and prioritize decisions
- Developing a sudden wealth planning strategy
- Creating a long-term plan that aligns with your goals, values, and needs
The truth is, an inheritance is a special gift and responsibility. For many families, it represents years of sacrifice, hard work, and intentional stewardship. Taking the time to understand your options can help you make decisions that honor both the person who left the inheritance and the people who may one day benefit from it. Thoughtful planning can help you approach every decision with wisdom and purpose. Let us help.
