A large inheritance can be both a boon and a burden—a boon because the money could come in handy someday, and a burden because it imposes a certain responsibility on the recipient to use it wisely and not squander it. Heres a step-by-step guide for anyone who has received or is anticipating to receive a large inheritance.
So, you’ve just found out you’re inheriting some money. First off, congrats! But also… now what? Whether it’s a surprise windfall from a distant relative or something you’ve been expecting from your parents, inheriting money can feel both exciting and overwhelming at the same time. I’ve helped many clients navigate this journey, and let me tell ya – it’s not as simple as just getting a check and going on a shopping spree.
The Reality Check: Don’t Count Your Inheritance Before It Arrives
First things first: if you’re just waiting for an inheritance and haven’t gotten it yet, stop! Things can change very quickly:
- Your relative might rack up major medical or nursing home bills late in life
- They might decide to leave everything to charity (surprise!)
- They could fall victim to financial scams (sadly common with elderly folks)
And let’s be real about the numbers – the average inheritance in America is about $46,200 according to the Federal Reserve. That’s helpful for sure, but probably not life-changing money for most people. Another study from Penn Wharton Budget Model puts it even lower at just $12,353 across all income levels.
Bottom line: Don’t plan to retire early because you expect to get a lot of money from an inheritance soon!
I Just Got the Call – What Happens Now?
When you first learn about your inheritance, you’ll probably experience a mix of emotions – grief for your loved one mixed with uncertainty about the money. Here’s what typically happens next:
The Waiting Game: Probate Takes Time
Sad to say, but most of the time, you won’t get the money right away. The legal process of distributing assets after death is called probate. It usually takes nine months, but it can take anywhere from weeks to years depending on:
- How complex the estate is
- Whether anyone challenges the will
- What types of assets are involved
This waiting period is actually a blessing in disguise. It gives you time to think about how you feel before you make any financial choices.
What Form Will My Inheritance Take?
Here’s something many people don’t realize – inheritances often aren’t just cash. You might receive:
- Cash in a bank account
- Stocks and bonds
- Retirement accounts like IRAs or 401(k)s
- Real estate (like the family home)
- Personal property (jewelry, cars, etc.)
- Business interests
- Life insurance proceeds
Each type of asset comes with different considerations and potential tax implications. For example if you inherit a house you’ll need to decide whether to live in it, rent it out, or sell it.
The Smart Money Moves: My 7-Step Plan for New Heirs
Based on the advice from multiple financial experts and my own experience. here’s what you should do when that inheritance finally lands
1. Hit the Pause Button (Seriously!)
When Jeannie Bidner’s husband received $20,000 from his grandmother, he immediately wanted to buy a boat. While that worked out for them in the end (they created lovely family memories on that pontoon), rushing into big purchases is usually not the best move.
Instead:
- Take a breath and toast your benefactor (maybe splurge on a nice bottle of champagne)
- Put the money somewhere safe like a high-yield savings account for at least 3 months
- Use this time to think about your financial priorities
This cooling-off period prevents emotional decisions you might regret later.
2. Get Professional Help (No, Really)
Listen, I’m all for DIY approaches, but this is one area where professional guidance can be invaluable – especially for larger inheritances. Consider talking to:
- A fee-only financial planner (who doesn’t earn commissions)
- A tax professional (for understanding tax implications)
- An estate attorney (especially for complex situations)
Even financial experts often use advisors themselves. As Jason Albano, managing director at Bank of America Private Bank, puts it: “Don’t wait until the decisions are urgent. Discuss in advance potential tax consequences with your advisor and personal tax professional.”
3. Take a Financial Snapshot
Before spending a dime, review your current financial situation:
- Do you have high-interest debt like credit cards? (Probably pay these off first)
- Do you have an emergency fund covering 3+ months of expenses? (If not, build one)
- Are you contributing enough to retirement? (An inheritance could help here)
- What are your short, medium, and long-term financial goals?
Albano suggests thinking in four buckets: spending needs, short-term goals, long-term goals, and philanthropy.
4. Deal With Taxes (Ugh, I Know)
Here’s some good news – in most cases, you won’t owe income tax on inherited money! However, there are exceptions and complications:
- Federal estate taxes: These only kick in for estates worth $13.99 million or more (2025), so most people don’t need to worry
- Inherited IRAs and 401(k)s: You’ll pay income tax when you withdraw money from traditional retirement accounts (but not Roth accounts)
- Capital gains: If you sell inherited investments or property, you may owe tax on any gains since the person’s death
- State inheritance taxes: Some states have their own inheritance taxes
Remember that the “step-up in basis” rule is your friend – inherited assets like stocks or real estate get a new cost basis equal to their value on the date of death, potentially wiping out years of capital gains.
5. Pay Off (Some) Debt
This is where things get a bit tricky. Should you pay off debt with your inheritance? It depends:
- High-interest debt (credit cards, payday loans): Almost always yes
- Moderate-interest debt (car loans, personal loans): Probably
- Low-interest debt (mortgages, some student loans): Maybe not
As Albano points out: “Does it make sense to pay off a mortgage at a rate below 3%? You might do better than a 3% return elsewhere.”
6. Invest Thoughtfully
Once you’ve handled high-priority items, consider investing the remainder. Some approaches:
- Diversify across different asset classes based on your risk tolerance
- Consider dollar-cost averaging rather than investing all at once
- Look at tax-advantaged accounts (though technically you can’t contribute inherited money directly to retirement accounts, you can use it to free up other income for those contributions)
7. Allow a Small Splurge (You’re Human!)
Finally, it’s OK to use a portion of your inheritance for something meaningful or fun. When Todd Silaika, a Merrill Lynch Wealth Management Advisor, discusses inheritances with clients, he often starts by “asking about their values and what wealth means to them.”
For Jeannie Bidner’s family, that pontoon boat created lasting family memories that honored her husband’s grandmother. Your splurge might be:
- A special vacation
- Home improvements
- A piece of jewelry or art to remember your loved one
- A donation to a cause they cared about
Just keep it reasonable – maybe 5-10% of the total inheritance.
The Emotional Side: It’s Complicated
I’d be missing something important if I didn’t mention the emotional aspects of inheriting money. Many people experience:
- Grief mixed with financial responsibility
- Guilt about receiving money from someone’s death
- Family tensions if inheritances aren’t equal
- Identity questions about “deserving” the money
These feelings are normal! Give yourself grace as you work through them. Some people find it helpful to use a portion of the inheritance to honor the person who left it to them – maybe supporting a cause they cared about or creating a tradition in their memory.
Common Inheritance Mistakes to Avoid
I’ve seen people make these blunders repeatedly:
- Spending too quickly: Treating it like “free money” rather than a financial resource
- Making decisions in grief: Major financial choices made while emotionally vulnerable
- Keeping investments as-is: Not evaluating whether inherited investments fit your own strategy
- Ignoring tax implications: Especially with retirement accounts or property
- Not updating your own estate plan: Your newly increased net worth might require changes to your will or trust
When to Update Your Own Estate Plan
An often overlooked aspect of receiving an inheritance is how it affects your own estate planning. As Albano notes, “Whenever your net worth changes, or you have a significant life event, you should take the time to review your estate plan and make appropriate changes.”
If your inheritance is substantial, you might need to:
- Update your will or trust
- Review beneficiary designations
- Consider asset protection strategies
- Reevaluate life insurance needs
- Plan for your own legacy giving
The Bottom Line
Inheriting money can be a blessing that helps secure your financial future – if handled wisely. By taking time to process both emotionally and financially, working with trusted advisors, and being strategic about debt payoff and investments, you can honor your benefactor’s gift in the best possible way.
Remember what happened with Jeannie Bidner’s family? That pontoon boat her husband bought with his inheritance initially seemed impulsive. But seven summers later, she reflected: “It has given us more fulfillment than I could have imagined, and that’s the true gift left behind by my husband’s grandmother.”
Whether your inheritance is large or small, taking a thoughtful approach will help ensure it makes a positive difference in your life – just as your loved one likely intended.
Have you received an inheritance recently? What questions do you still have about managing it? Drop me a comment below!
Pay Off Debts
One worthy use for inherited money is paying down your debts, particularly high-interest debt such as credit cards. Lower-interest debt, such as student loans or a home mortgage, is more of a judgment call. Perhaps you feel strongly that you need to have no debt at all. Or perhaps youd rather invest the money for a higher return than your low-interest debt is costing you.
Splurge … But Be Mindful
We’ll skip the finger-wagging if you want to spend some of your inheritance on yourself or your loved ones. Its your money now. But its worth remembering that when its gone, its gone, whereas if you invest sensibly, youll likely have it for years to come. You might even be able to pass it down to your own heirs someday.
Inheriting Money ? 4 Things To Do When Receiving an Inheritance – Retirement Planning Tips
FAQ
What is the first thing you should do when you inherit money?
Put the money in a safe account. When you get a lump sum, the first thing you should do is put the money in an FDIC-insured bank account. This will allow for safekeeping while you consider how to make the best use of your inheritance. The maximum coverage for each FDIC-insured account is $250,000.
How much money can you inherit without having to pay taxes on it?
While California does not impose an inheritance tax, the federal government does have an estate tax that applies to large estates. For 2024, the federal estate tax exemption is $12. 92 million per individual.
How does the IRS know if I inherit money?
Most of the time, the IRS doesn’t tax inheritance as income, and systems that track inheritance don’t send this information to the IRS automatically. However, certain situations,—such as income generated from inherited assets or filing requirements for larger estates—may involve the IRS.
What should you not do when you inherit money?
You should avoid impulsive decisions, such as large purchases or high-risk investments, before you’ve created a financial plan and consulted professionals. Don’t forget to pay off high-interest debt, save enough for the future, or get professional tax and financial advice to handle your money wisely. It’s also crucial not to immediately change your lifestyle or combine inherited investments with your own portfolio without assessing if they align with your financial goals and risk tolerance.
What happens when you get an inheritance?
Finally, it’s time for the inheritance to be distributed to the beneficiaries. Distribution of the inheritance is the last step because all bills and taxes must be paid. As the beneficiary, you don’t want to be held liable for any unpaid bills or deal with legal battles.
How do Inheritors waste inheritance money?
Making decisions when you’re still reeling from grief is one of the most common ways that inheritors waste their inheritances and make decisions they regret in the ensuing months and years. — Katherine Fox How will I receive inheritance money? How you receive inheritance money depends on the asset you are inheriting. IRA or 401k account
What happens if you withdraw money from an inheritance?
And if the withdrawal is large enough, it may put you into a higher tax bracket. Once you are aware of the general dos and don’ts of receiving inheritance money, it’s time to get more specific with the best practices to follow for financial windfalls.
When do you receive inheritance money?
When you receive inheritance money depends on the asset you inherited, the size and complexity of the estate you are inheriting from, and how the asset is transferring to you.
What happens if you inherit money through a will?
If you inherit money through a will, your inheritance may be subject to the probate process. Probate is a legal process in which a state court oversees the distribution of assets from a deceased person’s estate. It can significantly increase the time and expense associated with settling an estate. Not all estates pass through the probate process.
What should I do if I inherit a large amount of money?
If you inherit a large amount of money, take your time in deciding what to do with it. A high-yield savings account is a safe place to park the money while you make your decisions. Paying off high-interest debts such as credit card debt is one good use for an inheritance. Unless the inheritance is very large, you won’t owe tax on money you inherit.