Plan For an Inheritance: How To Manage a Large Inheritance Wisely

Receiving a large inheritance can be a blessing and a burden. If you have recently come into a large inheritance or are planning to inherit a substantial amount of money, it’s crucial that you make a comprehensive inheritance plan to manage your windfall responsibly.

Without proper financial planning for a large inheritance, you may end up squandering your newfound wealth or missing opportunities to create long-term security. This article provides actionable tips on what to do with a large inheritance and how to allocate inheritance money wisely to achieve your goals.

You’ll learn key strategies on how to manage a large inheritance, like paying off high-interest debt, maxing out tax-advantaged retirement accounts, and building an emergency fund. We’ll also cover smart investments to grow your inheritance over time. Whether you dream of early retirement, world travel, or starting a business, we’ll help you make informed choices on what should I do with a large inheritance to make the most of this rare financial gift.

With proper planning, you can honor your loved one’s memory by using your inheritance wisely to secure your own future. Let’s get started on the path to smart inheritance management.

So, let’s get started.

What is An Inheritance?  And How To Plan For an Inheritance

An inheritance is the assets, property, or money that a person receives after someone passes away. It can be a significant amount of wealth that can help the inheritor achieve their financial goals.

For example, if a person inherits a substantial sum of money, they can use it to invest, pay off debts, or save for the future. An analogy to understand inheritance is like receiving a gift from a loved one who has passed away.

Understanding what an inheritance means

Planning for a Large Inheritance How To Plan To Receive an Inheritance
Planning for a Large Inheritance How To Plan To Receive an Inheritance

Receiving an endowment can be a life-changing event, but it’s crucial to understand what it means and how it can impact your financial health.

Simply put, an inheritance is a windfall of money or assets, but it’s not without its complexities.

What assets have you inherited?

It’s essential to know what assets you’ve inherited and their value. Some common assets that people inherit include cash, stocks, real estate, vehicles, and personal belongings.

Knowing the assets you’ve inherited will help you create a plan for managing your inheritance effectively.

Part of your inheritance that you can access

While receiving an inheritance can be life changing financially, it’s essential to know what part of it you can access immediately.

Depending on the type of bequest and the wishes of the deceased, some assets may be locked up in trust accounts or other legal entities.

It’s crucial to understand any restrictions or limitations on accessing your inheritance to avoid any legal issues. Nothing in this article is meant to be tax or legal advice, please speak with a financial professional.

Here’s a list of common assets you’ll need to know:

  • Cash
  • Stocks and bonds
  • Real estate
  • Vehicles
  • Personal belongings

How To Plan To Receive an Inheritance

What to do when you’ve inherited a house?

Inheriting a house can be complicated, and there are several options to consider.

HOW TO AVOID PAYING CAPITAL GAINS TAX ON INHERITED PROPERTY?

Here’s a table to explain what to do when you’ve inherited a house:

OptionDescription
Keep the houseYou can keep the house and use it as a primary residence or rental property.
Sell the houseYou can sell the house and use the proceeds for other financial goals.
Rent the houseYou can rent the house and receive rental income.
Donate the houseYou can donate the house to a charitable organization and receive a tax deduction.

Understanding what an inheritance means and what assets you’ve inherited is essential for effective financial planning.

In the next section, we’ll explore the tax implications of receiving an inheritance and how to minimize taxes on your inheritance.

Receive an Inheritance: How To Manage a Large Inheritance Wisely

Receiving an inheritance and settling an estate can be overwhelming, and it’s important to have a plan in place to make the most of it.

Here are some simple steps to help you plan for your inheritance:

1. Importance of Having a Financial Plan

Having a financial plan is crucial to achieving long-term financial success. Your endowment should be part of your overall financial plan, which should take into account your goals, risk tolerance, and investment strategies. If you don’t already have a financial plan, now is the time to create one.

2. Benefits of Hiring a Financial Planner

Working with a financial advisor can help you make informed decisions about your inheritance. A financial planner can provide you with personalized guidance, help you create a financial plan that meets your unique needs, and offer ongoing support as your financial situation changes.

3. Understanding Estate Planning

Estate planning involves creating a plan for how your assets will be distributed after your death. This can include creating a will, establishing trusts, and naming beneficiaries. Think of wealth planning as a way to ensure that your wishes are carried out after you’re gone.

To help you understand estate planning better, consider this analogy:

Estate planning is like building a house. Just as you need a blueprint to build a house, you need a plan to distribute your assets after your death. And just as a house needs regular maintenance and updates, your estate plan should be reviewed and updated regularly.

For example, I had a client who inherited a significant amount of money from their parents. Without proper estate planning, they could have faced significant tax consequences and missed opportunities to grow their wealth. By working with a financial planner and an estate planning attorney, they were able to create a plan that met their unique needs and goals.

What is Estate Planning?

Essential & Basic Estate Planning Documents You Need Today

How to Manage Your Inheritance

Once you’ve received your inheritance, it’s important to manage it wisely. Here are some tips to help you make the most of your inheritance:

  • Create a budget: Determine how much money you will need to cover your expenses and create a budget to help you stay on track.
  • Pay off debt: Use your inheritance to pay off any high-interest debt, such as credit cards or loans.
  • Invest wisely: Work with a financial planner to develop an investment strategy that aligns with your goals and risk tolerance.
  • Consider tax implications: Consult with a tax advisor to understand the tax implications of your inheritance and any investment decisions you make.

Inheriting money can have significant tax implications. In the next section, we’ll discuss how to minimize your tax liability and make the most of your inheritance.

Estate Taxes & Inheritance Tax Implications of Inheriting Money

Inheriting a large sum of money can come with various tax implications that can be confusing and overwhelming. It’s essential to understand the different types of taxes that may apply to your inheritance and how to manage them.

Learn more in my recent article: Is Your Estate Taxable?

Estate Tax according to the IRS

Inheritance Tax and How It Works

Federal inheritance tax is a tax on the assets or property that you inherit from someone who has passed away.

It’s important to note that not all states impose wealth transfer taxes, and the tax rate and exemptions can vary widely by state. In general, however, the tax is usually paid by the person receiving the inheritance and is based on the value of the assets they receive.

Capital Gains Tax on Property in Texas

To better understand the “death” tax as some people call it, let’s use an analogy.

Think of it like a gift tax that applies to the person receiving the gift rather than the person giving it. Just like with gift taxes, there are exemptions and limits to inheritance tax that you should be aware of. For instance, some states have an exemption for certain family members or for estates below a certain value.

To illustrate further, let’s take the example of one of my clients.

Janet inherited a vacation home from her aunt in a state that imposes an inheritance tax. The value of the property was $500,000, and the tax rate in her state was 5%. This means that Janet would have to pay $25,000 in wealth transfer tax.

Texas Inheritance Laws

Capital Gains Tax and How It Impacts Your Inheritance

Capital gains tax is another tax that can apply to your inheritance, depending on the assets you receive.

Capital gains tax is a tax on the profit you make when you sell an asset for more than its original purchase price.

When you inherit an asset, you typically receive it at its fair market value at the time of the previous owner’s death (cost basis). If you sell the asset for more than its fair market value when you inherited it, you may owe capital gains tax on the profit.

Read more in my recent article about Estate and Capital Gains Tax on an Inheritance

To better understand how capital gains tax works, let’s take a look at the following table:

AssetFair Market Value at Time of InheritanceSale PriceCapital Gains Tax
Stocks$100,000$150,000$10,000
Real Estate$500,000$600,000$15,000
Artwork$50,000$75,000$5,000

In the above table, we can see that if you sell an inherited asset for more than its fair market value, you may owe taxes or capital gains tax on the profit.

However, if you sell an asset for less than its fair market value, you may be able to claim a capital loss.

Federal Estate Taxes and How They Impact Your Inheritance

The federal estate tax is a tax on the value of a deceased person’s estate. Only estates that exceed a certain value are subject to this tax, and the tax rate can be as high as 40%.

However, there is a federal estate tax exemption that changes annually, and any estate below the exemption amount is not subject to the tax.

When you inherit money or assets, you may be subject to estate taxes. These taxes are based on the value of the estate and can be significant, depending on the size of the estate. To help you understand how estate taxes may impact your inheritance, I will include a table below for 2023.

2023 Estate Tax Exemption:

  • For those who pass away in 2023, the federal estate tax exemption amount will be $12.92 million.
  • Married couples will have a combined exemption of $25.84 million.
  • The federal tax rate for estates worth over the exemption amount is 40%.
  • The first $1 million of the estate is taxed at lower rates ranging from 18% to 39%, while everything over $1 million is taxed at 40%.

Here is the table summarizing the tax rates:

RateTaxable Amount (Value of Estate Exceeding Exemption)
18%$0 to $10,000
20%$10,001 to $20,000
22%$20,001 to $40,000
24%$40,001 to $60,000
26%$60,001 to $80,000
28%$80,001 to $100,000
30%$100,001 to $150,000
32%$150,001 to $250,000
34%$250,001 to $500,000
37%$500,001 to $750,000
39%$750,001 to $1 million
40%Over $1 million

How Property Taxes Can Affect Your Inheritance

Property taxes are another consideration to keep in mind when inheriting a home or other real estate. Depending on the state and local laws, you may be responsible for paying property taxes on the inherited property.

If the property taxes are delinquent, you may need to pay them to avoid foreclosure or other legal consequences.

Financial Needs to Consider with a Large Amount of Money

Managing a substantial inheritance can be overwhelming, and it’s essential to have a plan in place to ensure you are making the most of your new wealth. 

Here are some financial needs to consider:

  • Debt management: Pay off any high-interest debt first, such as credit card balances or personal loans. Consider refinancing any other outstanding debts with lower interest rates.
  • Emergency fund: Build up a cash reserve of three to six months’ worth of living expenses in case of unexpected events, in something such as a savings or money market account.
  • Retirement planning: Maximize your contributions to your retirement accounts, such as your 401(k) or IRA. Consider consulting with a financial planner to help you create a comprehensive retirement plan.
  • Education expenses: If you have children, consider setting aside funds for their education expenses.
  • Charitable giving: Consider making donations to charities or causes that are important to you.
  • Estate planning: After establishing your estate plan, be sure to occasionally review and update your estate plan, including your will, trust, and beneficiary designations.

By addressing these financial needs, you can ensure that your endowment is used wisely and benefits you and your loved ones in the long term.

Now that you have a better understanding of the tax implications and financial considerations that come with inheriting money, it’s time to think about how you can use your inheritance wisely.

In the following section, we will discuss some tips and strategies for managing your newfound wealth in a way that will benefit you and your loved ones for years to come.

Using Your Inheritance Wisely: Financial Goals to Set with Your Inheritance

Receiving an inheritance is often accompanied by mixed emotions. While it brings newfound wealth, it’s important to acknowledge that it may be a result of losing someone close to you. Therefore, it’s crucial to approach the situation with sensitivity and to have a solid plan in place to make the most of your inheritance.

This section will cover various aspects of using your inheritance wisely, such as setting financial goals, retirement planning, creating an emergency fund, exploring IRA options, and managing your windfall.

Before spending all of your inheritance that you received, take some time to assess your financial situation and set some goals. Consider paying off any high-interest debt, such as credit card balances, and establishing an emergency fund.

Beyond that, think about long-term goals such as saving for a down payment on a house, college tuition for your children, or retirement.

By setting specific financial goals, you can make sure your inheritance is being used in a way that aligns with your priorities.

How to Use Your Inheritance for Retirement

One of the most important financial goals to consider when receiving an inheritance is using it to secure your retirement. Consult with a financial planner to determine the best retirement plan for your situation, such as contributing to a Roth IRA or funding a 401(k) plan. K

Keep in mind that the earlier you start saving for retirement, the more time your money has to grow.

Cash Inheritance: Building an Emergency Fund with Your Inheritance

It’s always a good idea to have an emergency fund in case unexpected expenses arise. Aim to save at least six months’ worth of living expenses in a separate account, such as a high-yield savings account.

Using your inheritance to establish an emergency fund can provide peace of mind and protect you from financial hardship in the event of a job loss or medical emergency.

IRA and Other Retirement Account Options

If you’re looking to maximize your retirement savings, consider investing your inheritance into an Individual Retirement Account (IRA).

There are several types of IRAs, including traditional and Roth IRAs, which offer different tax benefits.

Consult with a financial advisor to determine which type of IRA is best suited for your financial situation.

Managing a Windfall to Ensure Financial Stability

Receiving a large sum of money can be overwhelming, but it’s important to manage it wisely to ensure long-term financial stability. Avoid impulse purchases and work with a financial planner to create a budget that includes investing, saving, and spend some of your inheritance.

How To Stop Spending Money 

By setting a plan and sticking to it, you can make the most of your inheritance and use it to achieve your financial goals.

In summary, using your inheritance wisely involves setting financial goals, planning for retirement, building an emergency fund, exploring IRA options, and managing your windfall. By taking a thoughtful and strategic approach, you can make your inheritance work for you and achieve financial stability.

What to Do With an Inheritance

Next, we will discuss what to do if you receive a large inheritance and are unsure of how to manage it effectively.

Beneficiary: What to do if you receive a large inheritance?

Steps to take when you inherit a large sum of money.

Receiving a large inheritance can be overwhelming, and it’s important to take the right steps to manage it effectively. Here are some steps to take when you inherit a large sum of money:

  1. Assess your financial situation: Before making any financial decisions about how to use your inheritance, take stock of your current financial situation. This includes your income, debts, expenses, and investments.
  2. Create a financial plan: Once you have a clear understanding of your financial situation, create a financial plan that takes your inheritance into account. Consider your short-term and long-term financial goals, as well as your risk tolerance and investment preferences.
  3. Consult with a financial planner: Working with a financial planner can help you make informed decisions about how to use your inheritance. A financial planner can help you create a customized plan that takes your unique financial situation and goals into account.
  4. Pay off high-interest debt: If you have high-interest debt, such as credit card balances, consider using some of your inheritance to pay it off. This can help you save money on interest payments over time.
  5. Invest the money wisely: Depending on your financial goals and risk tolerance, you may want to invest some of your inheritance in stocks, bonds, or other securities. Be sure to diversify your investments to minimize risk.

How the size of your inheritance impacts your financial plan

The size of your inheritance can have a significant impact on your financial plan. For example, if you inherit a large sum of money, you may be able to retire earlier than you planned or achieve other long-term financial goals more quickly.

Let me give you an example of a client of mine, Alexis. Alexisinherited $520,000 from her grandparents, and it completely changed her financial situation. With this windfall, she was able to pay off all of her debts, including her mortgage, and still had money left over to invest for the future.

Alexis was able to retire five years earlier than she had planned, and she now spends her time traveling and pursuing her passions.

How to deal with assets you’ve inherited that you don’t need

  • If you inherit assets that you don’t need or want, such as a house or a car, you have several options. You can sell the asset and use the proceeds to fund other financial goals, such as retirement or travel.
  • Alternatively, you can gift the asset to someone else, such as a family member or friend.
  • Finally, you can donate the asset to a charity and take a tax deduction.

How to allocate your inheritance to reach your financial goals

Allocating your inheritance wisely can help you achieve your financial goals more quickly. Think of your inheritance as a tool to help you reach your financial goals, rather than a windfall to be spent frivolously.

Let me give you an analogy: receiving an inheritance is like receiving a set of tools to build your financial future. It’s up to you to decide how to use those tools to build the life you want.

Here’s a table that shows how you might allocate your inheritance to achieve different financial goals:

Financial GoalAllocation Strategy
RetirementInvest in a mix of stocks, bonds, and other securities that match your risk tolerance and financial goals.
Paying off debtUse a portion of your inheritance to pay off high-interest debt.
Emergency FundSet aside 3-6 months of living expenses in a high-yield savings account.
EducationContribute to a 529 plan or other education savings account to cover future educational expenses.
Charitable GivingDonate a portion of your inheritance to charitable causes that align with your values.

Managing an Inheritance

And here is what it could look like, for a typical young family receiving an inheritance:

Financial GoalsPercentage of InheritanceInvestment Allocation
Paying off debt10%Low-risk bonds or mutual funds
Emergency fund10%High-yield savings account or money market fund
Retirement40%Diversified portfolio of stocks, bonds, and mutual funds
Children’s education20%529 college savings plan or other education savings accounts
Home purchase10%Real estate investment or down payment on a home
Travel or other personal goals10%Personal investment or discretionary spending

Of course, the percentages and investment options will vary based on your specific situation and financial goals. Working with a financial planner can help you make informed decisions about how to allocate your inheritance to meet your needs and achieve your long-term goals.

Do’s and Don’ts of Managing Your Inheritance

When it comes to managing a large inheritance, there are some important things to keep in mind. Here are some do’s and don’ts to consider:

Do’s

  • Do take your time: It can be tempting to start spending your inheritance right away, but it’s important to take the time to make a plan and ensure you’re making wise decisions for your financial future.
  • Do seek a professional advisors guidance: A financial advisor or planner can help you make informed decisions about how to allocate your inheritance, manage taxes, and achieve your long-term financial goals.
  • Do consider taxes: Inheritances can be subject to estate and income taxes, so it’s important to understand your tax obligations and plan accordingly.
  • Do pay off high-interest debt: Using some of your inheritance to pay off high-interest debt can free up more of your income for investing and achieving your financial goals.
  • Do consider philanthropy: If giving back to your community is important to you, consider setting aside a portion of your inheritance for charitable giving.

Don’ts

  • Don’t make rash decisions: Take the time to carefully consider your options and avoid making impulsive purchases or investments.
  • Don’t forget to plan for the future: While it may be tempting to use your inheritance for immediate gratification, it’s important to consider your long-term financial goals and make decisions that will help you achieve them.
  • Don’t overlook tax implications: Make sure you understand the tax implications of your inheritance and plan accordingly to avoid any surprises down the line.
  • Don’t neglect your existing financial plan: If you already have a financial plan in place, make sure your inheritance aligns with your existing goals and strategies.

What Should I Do With My Inheritance?

Conclusion

Inheriting a large sum of money can be a life-changing event, but it’s important to approach it with caution and careful planning.

By setting clear financial goals, seeking professional guidance, and making informed decisions, you can use your inheritance to build a more secure financial future for yourself and your loved ones.

Remember, every situation is unique, so take the time to create a plan that works for you and your specific needs.

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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.