Receiving an inheritance can be a transformative moment in your financial life—provided you handle it properly. When you come into a sudden influx of money, it’s not always easy to look past the tantalizing prospects of short-term splurges. But with a little patience and a bit of planning, the money you inherit can be used to set you and your family up for more rewarding financial successes over the long term.
Here are a few things you can do to prepare for receiving an inheritance, to help ensure that you are truly making the most of your newfound wealth.
Understand the tax implications of inheriting
If the value of your benefactor’s estate exceeds the federal gift and estate tax exemption amount ($15 million per individual in 2026, $30 million for a couple), the portion of the estate above the available exemption may be subject to a 40% tax. Additionally, some states (and the District of Columbia) currently have their own estate tax, typically with much lower exemption amounts. As the inheritor, you are not responsible for paying these taxes; they will be paid out of the deceased’s estate.
However, several states do have an inheritance tax, which the inheritor may be responsible for. Accordingly, depending on the size of your benefactor’s estate and the state or states involved, estate or inheritance tax could have a substantial impact on what you inherit. Plus, the complexities of settling your benefactor’s estate—paying out taxes and resolving other outstanding debts and expenses prior to any final distributions of assets—may mean that you may not receive your inheritance for some time, perhaps even a year or more following your benefactor’s death.
The SECURE Act of 2019 introduced new provisions regarding how inherited retirement accounts must be handled. Most non-spouse beneficiaries of an IRA or employer-sponsored plan will need to take annual required minimum distributions (RMDs) from the account and fully empty the account within 10 years. Different RMD rules apply to surviving spouses and other “eligible designated beneficiaries” (i.e., children of the original account owner under the age of 21, an individual not more than 10 years younger than the original account owner, and disabled or chronically ill individuals). Given how complex these rules can be, you may want to go over them with an estate planning attorney or tax professional. A firm understanding of how the rules apply to your situation will be necessary to help ensure you avoid being penalized for failing to take RMDs and are able to plan for the impact any RMDs might have on your taxes in the year they are distributed.
Learn more: What you need to know about the rules for inherited IRAs
If you inherit assets such as non-retirement securities or real property from your benefactor, you may benefit from a “step up” in the cost basis of those assets. Upon the death of the benefactor, the cost basis of the assets is immediately increased to reflect the fair market value at the date of death. For appreciated securities, this can result in a significant reduction in the capital gains tax due should you decide to sell those assets.
Think before you spend
When you finally receive your inheritance, try not to make any big decisions before you undertake a full assessment of your current financial circumstances and reevaluate your goals. If you have inherited multiple accounts or assets that are spread across multiple firms, you may want to consider consolidating everything at a single institution to help ensure you can easily track what you now possess.
Try to think in terms of short- and long-term needs:
- Short term: Consider paying off high-interest debt, such as credit cards, and topping off your emergency savings to help protect against unexpected expenses.
- Long term: Evaluate the longer-term goals that may be important to you. Perhaps it’s saving for retirement or for a child’s college fund. Maybe you are interested in purchasing a home or investment property. Once you’ve identified your desired goals, you can consider constructing a diversified portfolio that can help you achieve the growth potential necessary to reach them in the timeframe you have in mind.
Once you’ve handled your short-term debts, established an appropriately sized emergency fund, and invested assets with an eye toward your long-term goals, you can more confidently apply what may be left over toward your discretionary spending goals.
Protect your assets—and yourself
With newfound wealth comes new risks. Lawsuits, creditors, and changes in your personal life, such as divorce, can endanger your assets and undermine your ability to reach your goals. If you are concerned about the security of your money, you may wish to speak to a professional about ways you can protect yourself from unexpected risks, such as liability insurance, trusts, and pre- or post-nuptial agreements. Additionally, this may be a good opportunity to increase your life, disability, and long-term care insurance coverage, to help protect your family and yourself against accidents and rising health care costs.
Revisit your estate plan
Part of receiving a legacy is ensuring that it can pass on to the next generation. With a big increase in net worth, it’s always a good idea to revisit your estate plan to help ensure you have accounted for your new assets and made clear how you want them to be transferred to your children, grandchildren, or other inheritors. With an up-to-date will, named beneficiaries for financial accounts and life insurance policies, and properly titled assets, you can rest assured that your intentions will be carried out properly and in a tax-efficient manner.
Work with a professional
The financial and emotional impacts of receiving an inheritance can be daunting, and it isn’t always easy to go it alone. You may want to consider working with a financial professional who has experience in dealing with the many facets of managing wealth. They can serve as a sounding board for your ideas and concerns and help you identify opportunities that put you in the position for potential long-term success.