7 steps to take when you inherit

December 2, 2022


When you come into an inheritance it can be challenging to know what path to take, and how to be intentional with your long-term financial planning. Here are 7 helpful steps you can discuss with your financial professional to avoid making quick or impulsive decisions.

Suffering the loss of a loved one can be challenging and complicated. You don’t want to compound those challenges with bad decisions that can potentially squander your inheritance. Nor do you want to dishonor the legacy of the family member or friend who wanted to provide you with more financial flexibility after death.

Most importantly, don’t view inheritance as a short-term or one-shot gain. Think of it as a chance to be intentional with your long-term financial planning. Consider the tax and interest implications of your choices. And avoid making quick or impulsive decisions.

Here are steps you should take when you receive an inheritance:

  1. Meet with your financial professional. If you don’t yet have a financial professional, then the first blessing of your inheritance is that it should encourage you to find one. If you do have one, check in with that person. Your inheritance changes your financial picture and an expert can explain what you need to know.
  2. Consider all your options. Your financial professional will likely have more options for you to consider than you could come up with on your own. Some options include investing in your portfolio or retirement accounts, growing your emergency fund, setting up a college fund, paying off your student debt – or your child’s – or buying a home.
  3. Plan short-term purchases with an eye toward your future. Of course, you should enjoy some of your inheritance, perhaps with a vacation or a new car. But to boost your financial health, plan for all your long-term savings and investment needs first, and then look at spending just a small portion on yourself.
  4. Evaluate how one part of your plan can affect another. Consider your inheritance decisions with an eye on a single decision’s impact on the others. For example, you may have inherited enough money for a down payment on a house. But that might be a poor choice for you if you have an ongoing mortgage loan or if house maintenance and real estate taxes keep you from saving for emergencies and retirement.
  5. Don’t think you’ve won the lottery. Receiving a sizable inheritance can feel like winning the lottery, but it can create a more complex financial planning issue for you. Lottery winnings can be distributed in periodic payments over a set period of time, reducing the likelihood of making a poor decision. But make a mistake with an all-at-once inheritance, and that money could disappear as quickly as it came.
  6. Plan for inheritance taxes. You don’t have to pay estate taxes, since your loved one’s estate pays before your inheritance reaches you. But you may have to pay inheritance taxes. Six states impose such taxes, which vary in size from state to state. Good news: Spouses are generally exempt and other immediate family members may be exempt too. And at least there’s no federal inheritance tax to worry about1.
  7. Be strategic about debt. It can be fun to splurge on a personal investment, and it’s responsible to invest for the future. But if you have debts, paying them off may be your priority. Be selective: pay off loans with the highest interest rates first. You’ll save the most money over the long term. This can be another important area to consult with your financial professional about.

Right now, before you click away to another article, make these three commitments to yourself to avoid making quick decisions that can lead to pitfalls: Discuss your situation with a financial professional. Don’t spend your inheritance until you have a complete plan in place. And impose a waiting period on making decisions that are long enough for you to get the information you need, and to get over the worst part of the grieving period.

Taking these steps with your inheritance should put you in the best possible position while honoring the legacy of your loved one.

1. “Does your state have an estate or inheritance tax?,” Janelle Fritts, The Tax Foundation, February 24, 2021

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