Inheritance can often feel like a double-edged sword. While a large influx of money can be a welcome blessing to those who may be in debt, are looking to purchase a home or a business or are wanting to start investing toward retirement, inheritance also often means the passing of a loved one and a period of emotional turmoil and grief.
When paired together, these two major life changes can cause even the most financially savvy person to make a few mistakes. While emotions are high, it’s unwise to make any major financial moves. Instead, allow time for grief and healing before moving forward.
Once you feel ready to take action, consider the following advice from the financial experts of Kiplinger Advisor Collective. Below, they discuss the next steps you should take after inheriting money from a loved one and some of the mistakes they’ve witnessed others make along the way.
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Avoid spending as a coping mechanism
“Losing a loved one is a deeply emotional experience that can disrupt rational decision-making. In the fog of grief, I've witnessed some individuals make impulsive purchases as a temporary form of comfort or escape. Instead of acting on impulse, which often leads to regret, many inheritors would benefit by placing the funds in a high-yield savings account until the emotional dust settles.” — Dennis McNamara, wHealth Advisors
Give yourself enough time to process
“I think that people don't allow themselves the time and space to process both the emotional and financial impact of the inheritance. Susan Bradley, founder of the Sudden Money Institute, so eloquently states, ‘When life changes, money changes. And when money changes, life changes.’ People need the time to identify, quantify and qualify their individual life and financial goals.” — Marguerita Cheng, Blue Ocean Global Wealth
Invest in the future
“Many people will emotionally spend inheritance on pure expenses, such as cars, vacations and other consumable goods. This has instant gratification, but from a financial perspective, it is an expense and not an appreciating asset. Use this inheritance as an investment for the future, such as setting aside a down payment on a house, opening a brokerage account or even thinking about continuing education.” — John Bodrozic, HomeZada
Kiplinger Advisor Collective is the premier criteria-based professional organization for personal finance advisors, managers, and executives. Learn more >
Consider how to maximize the funds
“A lot of people don’t do their research on how to maximize these funds. Instead of just putting it all into savings or just spending it, people should consider different ways to allocate it. For example, they could start paying off debt, or they could consider ways to invest it.” — Angela Ruth, Due
Seek help from a trusted professional
“One mistake I’ve noticed is that people don’t hire a financial adviser. If someone who doesn’t have an advanced understanding of financial management inherits money, it’s a good idea to hire someone to help manage it wisely. A financial adviser can help people make the most out of inheritance, as well as save them the time and stress of managing it alone.” — Justin Donald, Lifestyle Investor
Understand the nature and intent of the inheritance
“Most people simply retain inherited assets in the form they receive them. If it was a mutual fund, they keep it as is, or they store art and antiques. When capital passes from one hand to another, it's key to understand the nature and intent of those proceeds. Was it intended for specific uses, or is an investment aligned with their risk tolerance? Determine its best use and deploy it accordingly.” — H. Adam Holt, Asset-Map
Related Content
- If You Inherited an IRA Recently, You Could Be in for a Mess
- Why Inheriting Money May Not Solve Your Problems
- Expecting an Inheritance? Consider Coordinating Your Estate Plan with Your Parents’
- Don’t Count on an Inheritance for Your Retirement Plan
Disclaimer
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
FAQs
What you should do first will depend on what form (or forms) your inheritance takes. For example, if you inherit cash, you might want to park it someplace safe for a while. A federally insured bank or credit union account would be a good choice.
What is the first thing you do when you inherit money? ›
What you should do first will depend on what form (or forms) your inheritance takes. For example, if you inherit cash, you might want to park it someplace safe for a while. A federally insured bank or credit union account would be a good choice.
What happens when you inherit money from a relative? ›
Typically, the estate will pay any estate tax owed, with the beneficiaries receiving assets from the estate free of income taxes (see exception for retirement assets in the chart below). As a beneficiary, if you later sell or earn income from inherited assets, there may be income tax consequences.
What should you not do with an inheritance? ›
She shared five of the worst things you can do if you inherit money.
- Sitting on the cash long-term. ...
- Buying an asset you can't maintain. ...
- Holding onto an inherited property you can't afford. ...
- Putting all your money in one place. ...
- Not speaking to a financial planner.
The Executor must submit the Will and other important documents to the probate court, and then pay any outstanding bills and taxes. Once that's done, you can expect to receive a disbursem*nt of financial assets and transfer of ownership of any tangible assets.
How do beneficiaries receive their money? ›
After your loved one has passed away, the executor of the will starts transferring assets to beneficiaries once the probate court has reviewed the will. While this is an easy way of receiving inheritance money, it may not be the fastest way. Sometimes, the court can take up to two years to complete this process.
Do you have to report inheritance money to IRS? ›
In general, any inheritance you receive does not need to be reported to the IRS. You typically don't need to report inheritance money to the IRS because inheritances aren't considered taxable income by the federal government. That said, earnings made off of the inheritance may need to be reported.
Does inheriting money count as income? ›
Inheritances are not considered income for federal tax purposes, whether the individual inherits cash, investments or property.
How do you distribute inheritance money? ›
To begin the inheritance distribution process, you must submit the will through probate. After the probate court reviews the will, it's authorized to an executor, and the executor then legally transfers all assets—again, after settling taxes and debts.
Does inherited money count as income? ›
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income. Example: You inherit and deposit cash that earns interest income. Include only the interest earned in your gross income, not the inherited cash.
Inheriting $100,000 or more is often considered sizable. This sum of money is significant, and it's essential to manage it wisely to meet your financial goals. A wealth manager or financial advisor can help you navigate how to approach this.
What to do if you inherit $100 000? ›
If you inherit $100,000, you have a lot of options. You can pay off your highest-interest debts, save money for emergencies, or give some to charity. You might consider using it as a down payment on a house or adding it to your child's college fund.
What is considered a small inheritance? ›
Small inheritance ($20,000)
Even if you receive a modest inheritance—you have many options. One idea is to fund an emergency savings account. Experts recommend that you have six months of living expenses set aside for emergencies, and $20,000 would put you well on the way toward this goal.
What is proof of inheritance? ›
The death certificate for the person whose will you are named in. A copy of the legal will, if such a document is available. A document from the estate executor or administrator explaining who they are and their relation to the estate.
What is a letter of proof of inheritance? ›
An Affidavit of Inheritance is a legal document that verifies the identity of an heir or heirs of a deceased person and establishes their right to inherit the deceased person's property. It is typically used when the deceased person did not leave a will, or the will is being contested.
What is the average inheritance amount? ›
The average American has inherited about $58,000 as of 2022. But that's if you include the majority of us whose total lifetime inheritance sits at $0. If you look only at the lucky few who inherited anything, their average is $266,000. And if you look only at those in their 70s, it climbs to $344,000.
How long do you have to cash an inheritance check? ›
Banks don't have to accept checks that are more than six months (180 days) old. That's according to the Uniform Commercial Code (UCC), a set of laws governing commercial exchanges, including checks.
