What To Do With an Inheritance

Arielle O'Shea
Virginia C. McGuire
By Virginia C. McGuire and  Arielle O'Shea 

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There are plenty of horror stories about sizable inheritances squandered on fast cars and glittering parties. But careful planning and good advice can help people use their good fortune in a way that creates lasting value.

Consider these steps to make sure you handle your inheritance wisely, and make the most out of a financial windfall.

Keep your inheritance to yourself (for now)

The first step financial advisors typically suggest, especially if you've come into a large sum of money: Keep quiet.

That might go against your instincts to squeal about your new-found wealth, or even share that wealth. But there's time for that later. Take it slow, and limit your circle for now to one or two trusted family members or friends, preferably ones who have no expectation of receiving a share of the money.

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Take your time

Many people get anxious about letting a significant sum of money sit in a savings account, because they've been told that time is money due to compound interest. That's true. But in this case, taking a pause is better than rushing to make investment decisions and making mistakes as a result. The potential gains from quick moves can easily be outweighed by the risks of poor choices.

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Work with a financial advisor to create a financial plan

Whenever you get a financial windfall, it's wise to consider whether this is the time to hire a financial advisor who can help guide you. It doesn't matter how big your inheritance is: You'll likely benefit from creating a long-range, holistic financial plan. A fee-only, fiduciary financial advisor can work with you to create a comprehensive roadmap for how to put this money to work.

The financial plan will also help you prioritize various goals that may now be within reach — retiring early, or fully funding college for your kids — and keep you from making rash decisions before you've thought things through. And many financial advisors can help you create a plan to give to charity strategically, including options like donor-advised funds.

Consider taxes on the inherited amount

There is no federal inheritance tax, and only six states impose a tax on the recipient of an inheritance. There is, however, a federal estate tax, which is a tax on a deceased person's assets. In 2023, estate taxes only kick in when assets top $12.92 million. (In 2022, the exemption was $12.06 million.) At that point, the federal estate tax ranges from rates of 18% to 40%. Some states also have separate estate taxes.

If you think these taxes might apply to you, a good financial advisor or tax advisor can confirm that, and help you navigate the tax laws to ensure you pay your fair share but no more.

Enjoy it

Depending on the size of an inheritance, it’s not a bad thing to have a little fun. Once you’ve made a financial plan and allocated the money accordingly, there’s something to be said for treating yourself.

For smaller inheritances, that might mean using 10% as fun money. If it’s a larger amount, you might set a specific figure to spend on things you've long been unable to afford — that nice vacation abroad or an upgraded car. The key, though, is to take this step last — after you've gotten quality advice, created a financial plan and considered taxes.

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