Top Five Smart Ways to Enhance an Inheritance With a Wealth Planner

Receiving an inheritance can be a strange thing. While you are still in mourning, you realize that someone close to you has entrusted you with their money or assets. And these are now your responsibility. Many people feel a complex mix of emotions—grateful, heartbroken, and overwhelmed all at once. If you are unsure what to do with an inheritance, working with a wealth planner can help you understand what you received, avoid rushed decisions, and use the assets in a way that supports your financial goals.

What To Do With an Inheritance?

It’s quite common to not know what to do with inherited money. As a result, beneficiaries often freeze and do nothing with this sudden windfall of cash, electing to simply put it in a bank or an investment account and leave it alone. However, a lack of planning here could mean you’re missing out on major opportunities.

What to Do First After Receiving an Inheritance

Before spending, investing, or transferring inherited assets, consider completing the following checklist:

Pause major financial decisions. Avoid large purchases, gifts, investments, or permanent lifestyle changes while probate, account transfers, and tax questions are still being resolved.

Identify everything you inherited. Create an inventory of cash, bank accounts, investments, retirement accounts, real estate, life insurance proceeds, trust interests, and business interests. Record how each asset is titled and where it is held.

Review the potential tax implications. Collect account statements, date-of-death valuations, property appraisals, beneficiary documents, and any Schedule A to Form 8971 you receive before selling or withdrawing assets.

Secure the money and accounts. Confirm that cash is held at an FDIC-insured institution and review coverage by depositor, insured bank, and ownership category. The standard FDIC insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

Update your financial plan. Reevaluate your emergency savings, debt, retirement timeline, investment strategy, charitable goals, and estate plan before deciding how to allocate the inheritance.

These steps can also be helpful when managing any type of financial windfall. Review the FDIC’s deposit insurance guidance before placing a large cash inheritance in one institution.

Inheritance-Type Comparison

Before you decide to stash the cash and forget about it, consider these five tips to enhance an inheritance and potentially improve your quality of life.

1. Revise your financial plan with the help of a wealth planner

You built your financial life based on your pre-inheritance view of the world. This means you need to revisit that plan and see if it still makes sense. If you receive an inheritance, it’s possible that you can now retire earlier, take less risk, enhance your investments, and more.

If you haven’t already, it would be a prudent decision to speak with a financial advisor to see how this sudden influx could impact your overall financial plan.

2. Pay down debt with a smart strategy

One action people are typically comfortable taking is paying down debt—and for good reason. Debt is stressful and expensive (in the case of credit card debt), and paying it off can provide a sense of accomplishment. If it relieves stress and frees up cash flow, it could be the right decision for you.

As with all financial decisions, it’s important to discuss your choices with your partner and family members. Effective communication is important for weighing the opportunity costs of using the inheritance for one thing over another. When you’re ready, comprehensive financial planning services can help you identify the most efficient way to pay down debt, while accounting for taxes, timing, and more.

3. Strategically renovate your home

Compared to the past couple of decades, mortgage rates are relatively high right now. As a result, countless people have reconsidered moving. Instead, they’re thinking about how to add more equity to their home.

Using an inheritance to renovate your home can make a lot of financial sense. Your home could end up being your biggest retirement asset, so any improvements you make can make you feel more comfortable or provide more equity—or both.

Before committing to any big projects, you may want to consult with your real estate agent and discuss what would be the most productive projects to consider. After that, ask a financial advisor how to leverage this project as a smart component of your overall financial plan.

4. Improve your health

Witnessing a loved one pass can often lead to an inspirational phase in our lives of improving our own health. Maybe there were steps they could have taken that would’ve extended their life, and you’re now looking to take those steps yourself.

Your inheritance can help fund lifestyle changes, like exercise equipment, nutritionists, personal trainers, running coaches, physical therapists, and more. Perhaps you didn’t previously have the means to pay for these things before, but now you can.

5. Honor the deceased

Think about how the deceased would have wanted you to use the inheritance, or how they would have used it themselves. If there was a place they loved like a local park, a memorial plaque can honor your loved one while providing you with a space to remember them.

If there was a cause they championed, you can now support it in their memory. In fact, charitable giving is a core part of retirement income planning, and there are a plethora of financial tools you can use to give to charitable causes while providing for yourself and your family down the road.

Common Mistakes to Avoid After Receiving an Inheritance

• Even a substantial inheritance can be diminished by rushed or uncoordinated decisions. Common mistakes include:

• Making major purchases or lifestyle changes before understanding the full value and tax treatment of the inheritance
• Selling inherited investments or property without documenting the applicable date-of-death value and cost basis
• Taking a lump-sum distribution from an inherited retirement account without calculating the potential income-tax impact
• Leaving a large cash balance at one bank without reviewing FDIC insurance limits
• Paying off every debt while leaving too little available for taxes, emergencies, or near-term expenses
• Investing the entire inheritance in one stock, property, business, or other concentrated asset
• Making large gifts or loans to family members before evaluating your own long-term financial needs
• Failing to update your financial plan, estate plan, insurance coverage, or beneficiary designations after your financial circumstances change

Frequently Asked Questions About What to Do With an Inheritance

1. What should I do first after receiving an inheritance?

Pause before making major purchases, gifts, or investments. Identify all inherited assets, secure the accounts, collect tax and valuation documents, review any deadlines, and update your financial plan before deciding how to use the money.

2. Do you pay taxes on an inheritance?

The value of property received through an inheritance generally is not included in the beneficiary’s federal taxable income. However, income produced by inherited assets, gains from a later sale, trust distributions, and withdrawals from tax-deferred retirement accounts may be taxable. State estate or inheritance taxes may also apply. 

3. What is the step-up in basis for inherited assets?

The basis of inherited property is generally adjusted to its fair market value on the date of the original owner’s death, although exceptions and alternate valuation rules can apply. The adjusted basis is used to determine the potential gain or loss when the beneficiary later sells the asset. 

4. What happens when you inherit an IRA?

The distribution rules depend on the beneficiary’s relationship to the original owner, the beneficiary category, and whether the original owner had begun taking RMDs. Many non-spouse beneficiaries must empty the account within 10 years, while spouses and certain eligible designated beneficiaries may have additional options. 

5. Should I pay off debt or invest an inheritance?

High-interest consumer debt may be a reasonable priority after accounting for taxes and emergency savings. For lower-interest debt, compare the cost of the debt with your liquidity needs, risk tolerance, investment time horizon, and other financial goals. You may decide to divide the inheritance among debt repayment, savings, and investing.

6. How much of an inheritance should I keep in cash?

Keep enough cash to cover anticipated taxes, near-term expenses, and an appropriate emergency reserve. The remaining amount can then be allocated according to your financial plan. Review FDIC limits if the cash balance will exceed $250,000 in one ownership category at one insured bank. 

7. Is inherited money protected by FDIC insurance?

Inherited cash held in an eligible deposit account at an FDIC-insured bank is covered under the applicable deposit-insurance rules. The standard coverage amount is $250,000 per depositor, per insured bank, for each ownership category. Stocks, bonds, mutual funds, annuities, and other investment products are not covered by FDIC deposit insurance.

8. Should I update my estate plan after receiving an inheritance?

Consider reviewing your estate plan if the inheritance changes your net worth, property ownership, beneficiary intentions, charitable goals, or potential tax exposure. Coordinate your will, trusts, account beneficiary designations, insurance policies, and powers of attorney so they continue to reflect your wishes.

Inheritance, tax, and retirement-account rules can vary based on the assets involved and the beneficiary’s circumstances. This information is not intended to provide individualized tax or legal advice. Discuss your specific situation with a qualified tax or legal professional.

Make the Most of What’s Been Given to You

While it might not feel “right” to use the money you received from an inheritance, it was left to you for a reason. Take comfort in knowing the deceased thought enough of you to leave you something you would use and enjoy.

If you have any questions regarding how you can enhance your inheritance with the help of a wealth planner, consult an experienced financial advisor today.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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