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You Just Inherited Money Or Assets—Here's What To Do With It

Got an inheritance? Check out these easy tips for handling your new assets, from managing taxes to smart ways to invest and make the most of your windfall.

By Austin Payne

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Published 9.10.2024

Inheriting assets or a large sum of money is often a once-in-a-lifetime event. Due to its unexpected nature, you may not know what to do with your inheritance or where to begin. Below, we’ve outlined a few tips to help you avoid hasty mistakes and use your inheritance to secure your financial future.

What Are Inherited Assets?

Inherited money is a collection of assets you may receive from a loved one after they pass away. These assets may include cash, investments such as stocks and bonds, real estate, cars, jewelry, furniture, artwork, and other valuable items.

Depending on the structure of your loved one’s estate, you may receive the inheritance right away. If the estate has to go through probate, the process could take several months or longer.

Is Inherited Money Taxable?

One of the first questions you may have after receiving an inheritance is whether you owe taxes. Fortunately, there is no federal inheritance tax, and only a few states levy taxes on cash, real estate, or other assets you inherit.

The states that impose an inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If your state charges these taxes, you may qualify for an exemption depending on the size of your inheritance, among other factors.

While you are unlikely to owe taxes on the inheritance itself, you will owe taxes on future gains if you sell the inherited property. It’s always a good idea to consult with a professional to confirm your tax status and help minimize your tax bill.

What Should You Do When You Inherit?

Receiving an inheritance is an opportunity to get ahead financially, and making uninformed or hasty decisions can lead to costly errors. Here’s how you can make the most out of this unexpected opportunity:

Hold Off on Making Any Big Decisions

It’s critical to delay making any major decisions regarding your inheritance while you’re still in the early stages of grief. This helps avoid making emotional decisions with the money that you may not have made otherwise. Give yourself time to process the loss of your loved one to avoid lasting consequences.

Keep the Money in a Safe Place

One of the first things to do when you inherit money is to put it in a safe place, such as an FDIC-insured bank account. It’s a good practice to wait 6-12 months before making any big purchases with the inheritance money—unless it was a purchase you were already planning to make. As long as the money is properly stored, there’s no harm in waiting until your emotions are less raw.

Make a Plan for Your Inheritance

Now that you understand the tax implications of receiving an inheritance, it’s time to decide what to do with it. Here are some ideas on where to put inherited money to secure your future:

Pay Off Debt

Becoming debt-free is a dream for many, which is why some people choose to use some or all of their inheritance to pay off debts such as credit card balances, loans, mortgages, and other types of debt.

Whether you choose to pay off some or all of your debt is up to you. However, you may want to consider paying off any high-interest debt to save money in the long run. It’s a good idea to consult with a fee-only financial advisor to help you run some scenarios and identify the most beneficial debt repayment strategy for you.

Invest

Another popular way to use an inheritance is to invest the money. Before proceeding, decide how much of your inheritance you want to invest and consider your goals. Here are some common ways people invest their inheritance:

  • Retirement: Investing in your retirement could be a great use of your inheritance. You might want to catch up on retirement savings or retire earlier.

  • College: You may want to use your inheritance to help cover the cost of sending your children to college. Consider funding a 529 plan or another college savings plan.

  • Large Purchase: Using your inheritance to afford a big purchase, such as a new house, car, or boat, is another option. Keep in mind that items like cars or boats may depreciate faster than other investments.

  • Business Venture: If you have an entrepreneurial spirit, consider investing in a business or startup. An inheritance can provide the financial flexibility to pursue these opportunities.

Give to Charity

You might want to factor charitable giving into your inheritance strategy. Whether you wish to support a local nonprofit or make a large donation to a hospital that cared for a loved one, charitable giving can be a meaningful way to use your inheritance. There are tax deductions available for charitable contributions, so it’s best to discuss the right strategy with your financial advisor.

Depending on the size of your inheritance and your goals, your plan may be a combination of the above strategies. The idea is to think strategically about your inheritance and how it can help you achieve both new and existing goals.

Create or Update Your Estate Plan

Receiving an inheritance may prompt you to think about your own estate plan. If the process was straightforward, you might want to ensure the same for your heirs.

Simultaneously, if inheriting was complicated, it should motivate you to take action to simplify the process for your loved ones in the future.

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