When it comes to getting an inheritance, it can be tough to know what to do with it and how to get the most out of the money. But with a little planning, preparation, and careful consideration of things you can do with your inheritance, you can feel confident you’re making the right moves while honoring your late loved one in the process. Let’s dig in to preparing for an inheritance and options for what to do with the money.
How to plan and prepare for an inheritance
If you’re in line to inherit money or assets from a late loved one’s estate, there are a few important steps you can take to help you plan and prepare. Here are some things to consider before receiving your inheritance.
Get organized
Organize all the legal and financial documents you’ve collected for easy reference.
Inventory your assets and liabilities
Assess your changed financial situation, specifically your net worth—the difference between your assets and your liabilities—to help you determine new goals and financial plans.
Consider working with a team of professionals
As with many financial matters, consulting a financial or tax advisor, as well as an estate planning attorney, could be helpful.
Take your time
Consider avoiding making any major decisions within the first year, such as investing lump-sum inheritances, or insurance or pension payouts depending upon your situation.
Park your money
Until you’re certain, consider keeping your money safe and secure. For some people, it's better to lose some potential return in a low-interest account than to take major risks or make financial moves without considering taxes or your entire financial picture.
There are a few options, including modest interest-paying certificates of deposit, money market accounts, or Treasury bills, to name a few—though for the longer term, these kinds of investments may be too conservative. Consider consulting a financial professional to talk through your specific scenario.
Learn the basics of investing
If you’re an investing novice, consider learning more. The world of investments can seem overwhelming at first, but becoming more knowledgeable can help you feel confident about your future choices.
What does it mean to disclaim inheritance?
Although uncommon, there are several reasons why you might want to give up an inheritance. In this case you could "disclaim", decline, or give up your rights, which would allow the assets to bypass you and go directly to the contingent beneficiary.1
For some people, an inheritance might be more of a burden than a gift. In some cases, inheritances could create tax or financial compilations, or you may have other reasons for choosing not to inherit assets.
If disclaiming your inheritance is the right decision for you, remember laws and guidelines vary by state.1 Consulting an attorney about the correct processes, guidelines, and timelines for your state is always a good idea.
If you want to allow another beneficiary to claim some or all of the inheritance, you'll need to make that decision before making other claims.
If you want to disclaim an inheritance
You can disclaim or refuse all or part of your inheritance, which allows the money to be passed to the next named beneficiary. This may be advantageous if the other beneficiaries are younger and able to leave the money invested, or estate taxes are a concern.
Generally, you’re required to make this decision within 9 months of the death and before you’ve taken possession of the money.
Claiming an inheritance
To claim an inheritance for yourself, there are three basic options: rolling over, cashing out, or leaving the money where it is. The details are different depending on the specifics of the account.
Spouses have the options of rolling over into a workplace account, into their own traditional IRA or Roth IRA, or an inherited IRA. For all beneficiaries, cashing out may have tax implications, so ask questions and make sure you understand fully.
Depending on the type of account, you may be able to leave the money where it is at least for a while, taking potential RMDs and working within the rules of that account.
Ideas for what to do with your inheritance
You may have the opportunity to improve your finances, catch up on some bills, or build an emergency fund, for example:
- Pay off high-interest debt
- Create an emergency fund of at least 3–6 months of essential expenses
- Revisit your investment plan with an advisor
- Invest in yourself by going to back to school or taking a sabbatical
Other ideas for an inheritance
- Spend some. There are ways to spend some of your inheritance that also honor the spirit of your loved one. Maybe you need a safe, new car or a long-overdue vacation with your spouse or the whole family.
- Give to charity. You may want to donate some of your newfound money to charity because of either potential tax implications or your increased ability to make a difference, or both. Charitable gifts can be made to honor your loved one as well. It could be a memorial plaque or bench in a meaningful location—or it could be a donation to a cause they supported. Depending on the size of your donation, you might simply write a check, donate appreciated assets, or consider a more formal arrangement.