What to Do With an Inheritance: A 6-Step Checklist

A multi-generational family in the woods after discussing what to do with an inheritance

Key Takeaways

  • Take your time before making financial decisions after receiving an inheritance to deal with emotions and make informed choices.
  • Consider your financial goals and prioritize them when deciding how to use the inheritance.
  • Plan investments wisely, considering your personal situation, and be cautious of investments that may exceed the size of the inheritance.
  • Allocate a portion of the inheritance for personal spending while still making progress towards long-term goals.
  • Use the opportunity to prepare your own estate plan, considering options like life insurance or trusts, to secure your legacy and minimize future inheritance taxes.

When a loved one leaves you an inheritance, one way to honor their memory could be to put that money to good use. But without a clear plan for what to do with an inheritance, that money may not go as far as you'd hoped. If you need help getting started, here's a checklist to consider.

1. Take Your Time

You may not want to rush to figure out what to do with an inheritance right when you receive it. It's important to deal with the emotions of your loss, which can take some time, so you may want to wait before investing or spending the money. Consider keeping the money in liquid vehicles such as savings accounts for a short time until you feel ready to make financial decisions.

2. Consider Your Financial Goals

When you're ready, think about what your most important financial goals were before you received the inheritance. They may help guide your decisions about how to use the new windfall. Let's say, for example, that your goals in order of priority were:

  1. Pay off credit cards and student loans.
  2. Build your emergency fund.
  3. Contribute to your retirement plan.
  4. Pay off your mortgage.

With this list in mind, you can start working through each goal. If you have a smaller inheritance, you may have just enough to pay off your high-interest debt with a little leftover for your emergency fund. With a larger six-figure windfall, you may be able to move to the other larger goals.

The key is to try to stick to your financial plan. When people receive a sudden rush of money, they can treat it differently than regular income. For example, it might be tempting to go buy a second home or car, even though your existing financial plan dictates that you should concentrate on paying off debt first.

3. Plan Investments

If you'd like to invest part of your inheritance, there are a number of options you could consider, and what's right for you will depend on your personal situation. For instance, you could think about investing in stocks, bonds or mutual funds. It's important to remember, however, that these investment types do not guarantee growth, and may instead lose value over time. You could also think about moving some of the inheritance into an annuity, which will turn the proceeds into guaranteed payments that can last for the rest of your life.

Consider being cautious about investments that cost more than the size of the inheritance, such as buying a rental property. You may not want to make a partial down payment on a second home and then realize later you can't keep up with the mortgage payments. You might consider investments in real estate if you receive a significantly large inheritance that could allow you to pay off the entire purchase, or most of it, all at once.

4. Keep Some for Spending

There's nothing wrong with using part of your inheritance on something fun like a family vacation or a new car. The key is to consider picking a percentage of the money to set aside for personal spending that will allow you to still make progress toward your long-term goals.

You can think of this allocation as spending toward your personal goals — seeing more of the country, embracing entertainment and culture, etc. — which are separate from (and probably secondary to) your greater financial goals. Don't hesitate to treat yourself, but make a spending plan and aim to follow it.

5. Prepare Your Own Estate Plan

Receiving an inheritance could be your chance to prepare your legacy for the next generation of your family. For instance, you could use some of the proceeds to purchase life insurance or put the inherited money in a trust.

Estate planning can also be important if you inherited enough that you owed inheritance taxes. If you're able to continue growing that money, your heirs could end up in the same situation. By devising an estate plan that prepares for these taxes, you may be able to help your heirs receive their future inheritance as smoothly as possible.

6. Meet With a Financial Professional

As you go over all these steps, it could be a good time to meet with a financial professional who specializes in planning inheritances. They can go over your ideas with you and help you make appropriate investment decisions.

When your loved one put money aside for an inheritance, they likely did it to help you and your family live a better life. By following these steps for your financial road map, you could help to make their dream a reality.

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