You Just Received an Inheritance. Now What?

“When we lose one blessing, another is often most unexpectedly given in its place.”
C.S. Lewis

There are many things one can do to ensure a smooth transfer of assets from donor to beneficiary prior to death. This article does not address the transfer of assets from donor to beneficiary; it focuses on how the beneficiary can best handle the assets once bequeathed.

1. Keep inherited assets separate.

No one plans to get divorced. Yet, according to the United States Census Bureau, 42% of people do.^{1, 2} As such, be prudent and keep inherited assets separate from marital assets. This isn’t to say that you can’t use some of your inheritance to purchase things you and your partner agree to buy. Just be aware that if you commingle your inheritance with your marital assets and then get divorced, you risk losing half of your inheritance, if not more.

2. Pay down/off debt.

Debt is one of the leading impediments to financial freedom. Using your inheritance to pay down debt is one way to unshackle yourself from the chains of your creditors. Each debt paid off creates financial margin and flexibility. Use this potentially once-in-a-lifetime opportunity to move forward financially.

3. Make a list of your financial goals.

Knowing what to do after receiving an inheritance can be overwhelming. You may feel confused by the options. Perhaps you don’t have experience managing your own finances and therefore feel inadequately prepared for this new responsibility. Creating a list of your financial goals can help guide you forward.

Imagine what your life would look like if money and time were no object and ask yourself these questions: How would you spend your time? Would you continue doing what you do now with most of your time, or would you do something different? Where would you live? Would you stay where you are or move? Are there people or organizations you’d like to help financially or by providing your time and expertise?

Now try this exercise and write down the things that are different about the life of your dreams versus your current life, big and small. If you have debts, what would you pay off? Do you have an emergency fund, defined as an account that holds three to six months of living expenses? Are there any repairs or replacements that you’ve been putting off such as painting your home, replacing the roof, or repairing your car? Would you like to travel? Write down as many things as you can think of.

Now estimate how much each item will cost and write it next to each one on your list. Add up the costs and write the total at the bottom of the list. How does this total compare to the amount of your inheritance?

While this exercise can be exhilarating, it may also show that you can’t do everything on your list all at once. You’ll need to prioritize what is most important to you. If you spent all of your inheritance on the things on your list, are there expenses in your current life that would still be in place? Could you still support yourself after using your inheritance for the things you outlined?

Are there other ways you could do the things on your list? For example, once you pay off a debt, you can apply what you formerly paid on that debt toward another debt. You could also invest all or some of your inheritance and use some of the growth to pay for some of the items on your list; thus, preserving the principal of your inheritance.

4. Ensure your needs are taken care of before trying to care for others.

The instructions given before takeoff in an airplane regarding “placing the oxygen mask on yourself before assisting others” also applies to your finances. While it may be tempting to use your inheritance to help others with their financial problems, take care of your own financial well-being first. Use this as an opportunity to gain financial margin; doing so may put you in a stronger position to help others in the future.

5. Make a plan for potentially higher income taxes.

It is possible that your inheritance will move you into a higher tax bracket. For example, if you inherit an IRA, you may be required to receive required minimum distributions from the account annually. These distributions will be included in your taxable income and may move you into a higher tax bracket. If you’re still working, consider increasing your retirement and/or HSA contributions to reduce your taxable income. If you itemize your taxes, consider increasing your charitable donations. If you expect to receive a bonus or proceeds from the sale of a business, determine if you can push that income into a different year.

6. Understand the difference between saving versus investing.

Saving is what we do when we want to put money in a safe place that earns a little bit of interest but allows us to pull out the money at any time with no penalties. It’s used for things like an emergency fund or saving for a large purchase, like a car or vacation. You can open savings accounts at banks and credit unions. Money in a savings account is guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account; therefore, if the institution that holds your savings account goes bankrupt, the FDIC will make you whole up to $250,000.

Investing, on the other hand, is what we do when we want to put money away for many years – often five years or more. Rather than placing your money into a savings account, you place it into an account at a brokerage such as Charles Schwab or Fidelity; your cash is used to purchase shares of stocks and bonds. Investing offers the potential for a much higher return as compared with simply saving.³ The average return of the S&P 500 between 1957 and the end of 2023 was just over 10%.⁴ Unlike a savings account, money that is invested in the market is not guaranteed. While the stocks and bonds you hold may increase in value, they may also lose value or even become worthless. Even so, most investors are willing to take on this risk due to the potential for higher returns. They try to mitigate the risk by building a diversified portfolio.

7. Don’t blow the inheritance on “shiny objects.”

We’ve all heard stories about lottery winners who spend their winnings on frivolous things only to lose it all.⁵ Use this as an opportunity to build wealth rather than accumulate consumer goods that decrease in value the moment the money leaves your hands.

Conclusion
If you still feel unsure of the best path forward, speak with a trusted financial advisor who is a fiduciary. They will help you sort through options and potentially identify opportunities and pitfalls you may not have considered. Honor the loved one who left you an inheritance by being a good steward. Your future self will thank you!

Sources:

This article is for informational purposes only. The information provided does not purport to present a complete picture, but Focus Partners believes the information is representative of issues and needs facing some clients and why they may seek this service. Nor should it be construed as specific investment, tax, or legal advice. Individuals should seek advice from their wealth advisor or other advisors before undertaking actions in response to the matters discussed. No client or prospective should assume the above information serves as the receipt of, or substitute for, personalized individual advice. Numerous representatives of Focus Partners may provide investment philosophies, strategies, or market opinions that vary. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Focus Partners considers these sources to be reliable; however, it cannot guarantee the accuracy or completeness of the information received.

Services are offered through Focus Partners Wealth, LLC (“Focus Partners”), an SEC registered investment adviser with offices throughout the country. Registration with the SEC does not imply a certain level of skill or training and does not imply that the SEC has endorsed or approved the qualifications of Focus Partners or its representatives. Prior to January 2025, Focus Partners was named The Colony Group, LLC. Focus Partners has been part of the Focus Financial Partners partnership since 2011. RO-25-4178959

February 3, 2025