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What to Do After Receiving an Inheritance
Receiving an inheritance often produces a whirlwind of emotions. Typically it involves the passing of a loved one, so it's important to take your time and allow yourself to grieve before making any big decisions. You may feel pressure to act, but in most cases, the best first step is to slow down and understand the full picture.
1. Avoid major decisions at first
Unless something is genuinely urgent, give yourself time before:
- Making large purchases
- Selling inherited investments
- Paying off debts
- Making major changes to your lifestyle
It is important to determine what you inherited and what your priorities are prior to making any decisions.
2. Understand exactly what you inherited
Create a complete list of the inherited assets, including:
- Cash and bank accounts
- Brokerage accounts
- Traditional or Roth IRAs
- Real estate
- Life-insurance proceeds
- Business interests
- Trust assets
- Personal property
Record the approximate value, account type, ownership structure, custodian, and any relevant deadlines for each asset.
3. Gather and protect important records
Keep copies of estate documents, account statements, appraisals, tax records, death certificates, and information showing each asset's value when the original owner died.
This documentation may be important when calculating taxes later. Inherited property generally receives a new cost basis equal to its fair market value at the owner's death, although exceptions apply. Learn more from the IRS.
4. Identify tax rules before moving money
Different assets receive very different tax treatment.
Inherited retirement accounts require particular care. Distribution rules depend on your relationship to the original owner, the type of account, and other circumstances. Many non-spouse beneficiaries must empty an inherited IRA within ten years, and inherited traditional IRA withdrawals are typically taxed as ordinary income. Review the IRS beneficiary rules.
Before withdrawing money, selling investments, or changing account ownership, speak with a qualified tax or financial professional.
5. Review immediate needs
Determine whether part of the inheritance should be reserved for:
- Taxes
- Estate expenses
- Existing debts
- Near-term purchases
It is important to understand any immediate needs before implementing your long-term plan.
6. Build one coordinated plan
Investment management, taxes, estate planning, and cash-flow decisions should work together. A thoughtful plan can help you decide:
- How much to keep liquid
- How the assets should be invested
- Which accounts to draw from first
- How to manage taxes over time
- Whether your estate documents need updating
Take your time and think deeply about your plan before implementing it. Needing to make changes ahead of schedule could result in unnecessary tax bills or investment losses.
The bottom line
An inheritance does not require an immediate answer. Take time to understand what you received, avoid unnecessary tax mistakes, and build a plan around the life you want.
This article is provided for informational purposes only and should not be considered individualized investment, tax, or legal advice. Consult the appropriate professionals regarding your specific circumstances.