Receiving a large inheritance can be one of the most financially significant events of your life and one of the most overwhelming. Even if you expected it, the size of the bequest or the variety of assets involved can catch you off guard.
Before you make any major decisions, take a breath. The most important thing you can do in the early days after an inheritance is slow down. Here’s a practical framework for thinking through what comes next.
Don’t Rush Into Any Decisions
The impulse to act quickly can influence you to quit your job, buy a home, give money to family, make investments. Whole that’s understandable, it can also be costly. A windfall can temporarily cloud even the most measured financial judgment. Give yourself time, ideally several months, before making any major moves.
In the meantime, park the cash in an accessible, interest-bearing account like a savings account or money market fund while you get your bearings.
Understand What You’ve Inherited
Not all inheritances look the same. You may have received cash, investment accounts, real estate, a business interest, or a combination of all of these. Each type of asset comes with its own considerations.
- Cash and investment accounts give you the most flexibility but also the most responsibility. You’ll need to decide how to invest and manage those assets in line with your broader financial goals.
- Real estate requires a decision: keep it, sell it, or rent it. Each path has tax implications worth understanding before you act.
- Inherited stock may or may not fit your current investment strategy. Whether to hold or sell depends on your overall portfolio, market conditions, and tax basis considerations.
- Assets held in trust come with their own set of rules. If your inheritance is being administered through a trust, read the trust document carefully. It will outline how and when distributions are made and what the trustee can and cannot do. If anything is unclear, hire an attorney to help you understand your rights.
Know the Tax Picture
In most cases, you won’t owe income tax on the assets you inherit directly. However, any income those assets generate going forward, dividends, rent, interest, is taxable. And if you sell inherited assets, capital gains rules apply, though the tax basis is typically stepped up to the value at the time of the original owner’s death, which can reduce your taxable gain quite a bit.
If your inheritance is substantial, you may also need to think about estate and gift tax planning going forward, particularly if you plan to pass wealth to the next generation. A tax professional can help you understand your current obligations and identify strategies to minimize your long-term tax exposure.
Reassess Your Financial Plan
A large inheritance changes your financial picture in ways that go beyond simply having more money. Your investment strategy, insurance needs, estate plan, and tax obligations may all need to be revisited. Once the dust settles, work through these questions with a financial professional from Barnum:
- Do you have outstanding high-interest debt that should be paid off first?
- Are your retirement savings on track, or is this an opportunity to accelerate them?
- Do you have children whose education you want to fund?
- How does the inheritance change your investment risk tolerance and time horizon?
- Are your insurance coverages still appropriate for your new level of wealth?
- Does your estate plan need to be updated to reflect your new assets?
Be Thoughtful About Giving
Friends and family may approach you for loans or gifts after learning about your inheritance. It’s worth having a clear plan before those conversations happen rather than making decisions under social pressure. If you decide to give, do so intentionally, not reactively.
Any loan should be in writing, even within families, to protect the relationship and your legal rights. And keep in mind that federal gift tax rules apply to large gifts, though the annual exclusion allows you to give a meaningful amount to any number of individuals each year without triggering gift tax.
Charitable giving can also be a powerful tool, both for fulfilling personal values and for managing your tax exposure. A tax advisor can walk you through the current limits and the strategies available.
The Most Important Step: Get Advice Early
An inheritance is an opportunity, but only if it’s managed wisely. The decisions you make in the months following a large bequest can shape your financial life for decades. A qualified financial professional at Barnum Financial Group, working alongside your tax and legal advisors, can help you assess your new position, avoid costly mistakes, and build a strategy that makes the most of what you’ve received.
