Inheriting wealth can be an emotionally charged and financially complex experience. For many, this moment represents a bittersweet intersection of loss and opportunity. 

While the passing of a loved one often brings grief, the responsibility of managing newfound assets can also bring stress—especially for those unaccustomed to handling large sums of money. 

This guide is designed to help you navigate the challenges and opportunities of inheriting assets with confidence and clarity.

The Landscape of Inherited Wealth

According to the New York Life Wealth Watch survey, approximately 15% of American adults expect to receive an inheritance within the next decade. This massive "Great Wealth Transfer" is projected to pass down trillions of dollars in assets, with the average inheritance exceeding $700,000. 

Yet, statistics reveal that many recipients struggle to manage these funds effectively. Research indicates that 33% of inheritors deplete their windfall within two years, and over 70% exhaust their inheritance within five years.

The reasons for these financial missteps are varied. Some individuals succumb to impulsive spending, while others lack the knowledge or resources to create a sustainable financial plan. Women, in particular, report feeling less confident than men in managing inherited assets. 

By understanding the risks and taking proactive steps, you can avoid these common pitfalls and use your inheritance to secure a stable financial future.

Steps to Take When You Inherit Assets

1. Pause and Reflect Before Taking Action

One of the most critical steps you can take after receiving an inheritance is to pause and reflect. It’s natural to feel tempted to spend on big-ticket items or fulfill promises to family and friends. However, making hasty financial decisions can jeopardize your long-term goals.

Consider establishing a "Decision-Free Zone"—a designated period during which you refrain from making major financial commitments. Use this time to process your emotions, evaluate your financial situation, and seek professional advice. Communicating this pause to loved ones can also help manage their expectations and alleviate pressure.

2. Understand the Timing and Nature of Your Inheritance

Inheritances often take time to process. Liquid assets like cash or investments may be available within a few months, but other assets, such as real estate or business interests, can take longer due to legal or administrative processes. 

Setting realistic expectations about timing can help reduce stress and allow you to plan effectively. Additionally, it’s important to understand the type of assets you are inheriting. For example:

  • Cash and Investments: These are often straightforward but may require decisions about reinvestment or consolidation.
  • Real Estate: Property may involve maintenance, taxes, or decisions about whether to sell or retain.
  • Retirement Accounts: Inherited IRAs or 401(k)s come with specific distribution rules and potential tax implications.

3. Plan for Taxes

Taxes are a critical consideration when managing inherited wealth. The type of asset you inherit will determine your tax obligations:

  • Inherited IRAs: Non-spousal beneficiaries must distribute the account within 10 years of the original owner’s passing. These distributions are taxable as ordinary income.
  • Annuities: A portion of the inheritance may be taxable, depending on the contract terms.
  • Real Estate and Investments: Assets typically benefit from a step-up in basis, minimizing capital gains taxes when sold.

To avoid surprises, set aside a portion of your inheritance to cover potential tax liabilities. Consulting with a tax professional can help you understand your specific obligations and create a finaniclal plan accordingly.

4. Assess Your Financial Goals

Receiving an inheritance presents an opportunity to reassess your financial goals. Consider the following areas:

  • Emergency Savings: Use part of your inheritance to build or bolster an emergency fund.
  • Debt Reduction: Paying off high-interest debt can free up resources for other financial priorities.
  • Investments: Evaluate whether to invest in stocks, bonds, or other vehicles to help grow your wealth.
  • Retirement Planning: Consider contributing to a retirement account or funding a tax-advantaged savings plan.

5. Seek Professional Guidance

Navigating the complexities of inheritance can be overwhelming. A CERTIFIED FINANCIAL PLANNER® professional can provide valuable guidance tailored to your unique circumstances. Key benefits of working with a CFP® professional include:

  • Comprehensive Planning: CFP® practitioners can help you develop a strategy that aligns with your goals, whether it’s paying off debt, investing, or saving for retirement.
  • Tax Efficiency: CFP® professionals can recommend strategies to minimize your tax burden and maximize the value of your inheritance.
  • Investment Management: Advisors can assess your inherited assets and recommend adjustments to align with your risk tolerance and objectives.

Special Considerations for Inherited IRAs

Individual Retirement Accounts (IRAs) are a common type of inherited asset, but they come with specific rules and deadlines:

  • Non-Spousal Beneficiaries: Must withdraw the full balance within 10 years. Strategic distributions can help manage the tax impact.
  • Spousal Beneficiaries: Have more flexibility, including the option to roll the account into their own IRA.
  • Roth IRAs: Withdrawals are generally tax-free, but the 10-year distribution rule still applies for non-spousal beneficiaries.

Failing to follow these rules can result in penalties, so consulting a financial advisor is highly recommended.

Making the Most of Your Inheritance

To maximize the impact of your inheritance:

  • Create a Financial Plan: Break down your goals into short-term, medium-term, and long-term categories. For example:
    • Short-Term: Build an emergency fund and pay off high-interest debt.
    • Medium-Term: Save for a down payment on a home or fund a child’s education.
    • Long-Term: Invest for retirement or establish a legacy through charitable giving.
  • Regularly Review Your Plan: Life circumstances change, and your financial plan should evolve accordingly. Schedule regular check-ins with your advisor to stay on track.
  • Balance Current Needs with Future Goals: While it may be tempting to spend on luxury items, prioritize actions that provide long-term financial security.

Why Work with a Fiduciary?

A fiduciary is legally obligated to act in your best interest and provide prudent and loyal advice. William Bevins, CFP®, CTFA, is a fiduciary advisor with extensive experience in guiding clients through the complexities of inheritance planning. He prioritizes your financial well-being, offering tailored strategies to help you achieve your goals.

Whether you need assistance managing inherited assets, creating a financial plan, or navigating tax implications, William Bevins can provide the expertise and support you need to plan for today and tomorrow.

Summation

Inheriting wealth is a significant milestone that brings both opportunities and challenges. By taking a thoughtful and strategic approach, you increase the odds of transforming your inheritance into a foundation for long-term financial success. 

Remember to pause, seek professional guidance, and prioritize your goals to make the most of this opportunity. With the support of an experienced fiduciary like William Bevins, CFP®, you have help in navigating this journey with confidence and clarity.

Disclosures

Portfolio diversification does not ensure a profit or guarantee against a loss. All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Fixed income/bond risks include interest rate and credit risk. Rising interest rates will typically cause the prices of bonds and other debt securities to fall. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors.