How to Navigate Finances After an Inheritance
Navigating finances after receiving an inheritance requires a careful and informed approach. Below is a step-by-step guide with reputable sources to help you manage your inherited wealth wisely:
1. Take Time Before Making Big Decisions
Don’t make major financial decisions immediately. Give yourself time to emotionally process the inheritance and understand its implications. Source: Fidelity — “When you receive an inheritance, the best first step is to pause.”
2. Identify What You've Inherited - Source: Charles Schwab
Common assets include:
- Cash
- Investment accounts (IRAs, brokerage accounts)
- Real estate
- Personal property or businesses
Understanding the type of assets impacts how they’re taxed and managed.
3. Meet with Financial and Tax Professionals- Source: Consumer Financial Protection Bureau
A fee-only fiduciary financial advisor and a CPA or tax attorney can help you:
- Avoid costly tax mistakes
- Develop a financial plan
- Decide what to keep, sell, or reinvest
4. Understand Tax Implications - Sources: IRS, Kiplinger
- No federal inheritance tax, but estate taxes may apply if the estate exceeds $13.61 million (2024 threshold).
- State inheritance tax may apply in 6 states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania.
- Step-up in basis: For assets like stocks or real estate, the cost basis is reset to market value at the date of death—minimizing capital gains if sold.
5. Pay Off High-Interest Debts- Source: NerdWallet
Use part of the inheritance to:
- Eliminate credit card debt
- Refinance or pay down personal loans or student debt
- But avoid draining your emergency fund or long-term investments
6. Invest and Save for Long-Term Goals
Prioritize:
- Emergency fund (3–6 months of expenses)
- Retirement accounts (401(k), IRA, Roth IRA)
- College savings (e.g., 529 plans)
- Diversified taxable investments - Source: Vanguard
7. Update Your Own Estate Plan- Source: Nolo Legal Encyclopedia
- Update your will or create one if you don’t have one
- Revisit beneficiaries on retirement accounts, insurance, etc.
- Consider a trust for asset protection or tax advantages
8. Charitable Giving and Gifts - Source: IRS Gift Tax FAQ
You might want to share your wealth:
- Keep gifts within annual gift tax exclusions ($18,000 per recipient in 2024)
- Consider donor-advised funds for ongoing charitable giving