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My friend lost her fathera few months ago, and she was going to be receiving a significant inheritance. She was excited about the prospect of having all this new-found cash, as she has struggled financially for many years.
While she would rather have her father than the money, she began to tell me all the purchases she was going to be making in the coming weeks. A bedroom set, a new car, a trip to the Bahama’s – just to name a few.
While I don’t typically offer unsolicited advice, I couldn’t help myself but speak to her frankly about her plans.
You see, my friend has enormous credit card debt, some remainingstudent loans from grad school and a few personal loans she’s never repaid.
When I started the conversation, I expressed to her how much this money, if used properly, could ensure her financial security. I encouraged her to think about what she was doing and to instead pay down her debt, develop a savings strategy, look at putting some towards her retirement and set herself up for greater financial security.
Read: Wants vs. Needs {And How To Tell The Difference}
Her first response to me was, “But I deserve to buy these things.”
While I understand that kind of thinking, the type that tells you, you’ve worked hard – go ahead and reward yourself. I also know it’s that kind of thinking that got her into her current mess, and it would be that same thinking that would keep her in the mess.
Because we’re close friends, I eventually distanced myself from the situation and instead pointed her in the direction of few trusted financial advisors.
If you find yourself winning the lottery, inheriting money, or getting some other windfall, and you’re in debt, have little in the way of savings and investments then I encourage you to do a couple of things.
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What You Should Do If You Recently Inherited Money
1. Start dealing with your money issues immediately
Stop burying your head in the sand and start taking responsibility today to ensure your financial stability. You can’t continue to go on thinking that you deserve to spend money recklessly when you’re in debt and owe others. You’ve been given a tremendous gift via this inheritance. Now’s the time to make sure you take care of the outstanding debt you have so you can ensure a secure financial future.
Read: How Your Beliefs About Money Can Keep You Stuck {And What To Do About It}
2. Hire a money coach
A money coach can help you uncover all the emotional mindset issues that have plagued you your entire life so you can create a new, healthy relationship with money. I’ve worked with countless people on their money issues, and the one thing I know for sure is unless you uncover the psychological reasons you spend recklessly, you’ll never have a secure future. It’s worth the investment to hire a coach who can work with you to uncover these mindsets and roadblocks and help you create a new, healthy relationship with your money.
3. Hire a good financial advisor
A good financial advisor can help you come up with an investing strategy based on your risk tolerance and comfort level. He/She can help you look at the bigger financial picture, and help you save so when your ready for retirement you can still live comfortably. They can help develop a plan based on your values, goals, and desires too. Hire an advisor as soon as you get the money so they can help you plan right from the start.
Read: Money and Values {What’s One Got To Do With The Other}
A good lawyer will help you protect these assets for you and your family. You want to make sure the money you’re receiving will be protected. You also want to make sure you establish a will and trust, power of attorney, and health care proxy. All necessary parts of your overall plan. Don’t skip this step.
Read: Is It Time To Review Your Will?
5. Hire a good accountant
If you don’t already use an accountant, get one on your team. An accountant will walk you through all the tax implications of this money and what happens if you invest it, spend it, use it to pay off debt and other relevant issues.
My friend is now working on all of the above and is working her way down the road towards a better financial future. It won’t be easy as she has many past money demons she needs to battle, but she can win the war and you can too.
Miura's best advice for those who receive an inheritance is to leave it alone — but only for a short period of time. “I advise clients to have the money in the bank for six months. They can transfer it to a high-yield savings account, which is getting about 4 to 5% interest, which is pretty good right now.”
Miura's best advice for those who receive an inheritance is to leave it alone — but only for a short period of time. “I advise clients to have the money in the bank for six months. They can transfer it to a high-yield savings account, which is getting about 4 to 5% interest, which is pretty good right now.”
The best approach to sudden money is to go quietly and immediately into the planning phase – don't make announcements on social media and involve only key loved ones who need to be part of the process. Be true to your legacy.
In general, any inheritance you receive does not need to be reported to the IRS. You typically don't need to report inheritance money to the IRS because inheritances aren't considered taxable income by the federal government. That said, earnings made off of the inheritance may need to be reported.
If you inherit $100,000, you have a lot of options. You can pay off your highest-interest debts, save money for emergencies, or give some to charity. You might consider using it as a down payment on a house or adding it to your child's college fund.
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income.
After all debts have been paid, an estate's remaining assets — minus any probate feeds — are distributed to beneficiaries in accordance with the will, or — if there is no will — by following a state's laws of succession, otherwise known as the “order of heirs.”
Inheriting $100,000 or more is often considered sizable. This sum of money is significant, and it's essential to manage it wisely to meet your financial goals. A wealth manager or financial advisor can help you navigate how to approach this.
A good place to deposit a large cash inheritance, at least for the short term, would be a federally insured bank or credit union. Your money won't earn much in the way of interest, but as long as you stay under the legal limits, it will be safe until you decide what to do with it.
Even if you receive a modest inheritance—you have many options. One idea is to fund an emergency savings account. Experts recommend that you have six months of living expenses set aside for emergencies, and $20,000 would put you well on the way toward this goal.
There is a federal estate tax, however, which is paid by the estate of the deceased. In 2024, the first $13,610,000 of an estate is exempt from the estate tax. A beneficiary may also have to pay capital gains taxes if they sell assets they've inherited, including stocks, real estate or valuables.
Many people worry about the estate tax affecting the inheritance they pass along to their children, but it's not a reality most people will face. In 2024, the first $13,610,000 of an estate is exempt from taxes, up from $12,920,000 in 2023.
Income Tax on Inherited Assets: While there's no inheritance tax per se, beneficiaries may still face income tax implications. For instance, if you inherit a retirement account or other income-generating asset, any income received from these assets might be subject to federal and state income tax.
You can deposit a large cash inheritance in a savings account, either through a check or direct wire to your bank. The bigger question is what you should do with it once it's deposited. While that is ultimately your decision, it helps to have a plan. The more prepared you are before you get the inheritance.
If you need help with your estate plan or have received an inheritance, consider working with a financial advisor. What Is the Average Inheritance? On average, American households inherit $46,200, according to the Federal Reserve data.
Typically, the estate will pay any estate tax owed, with the beneficiaries receiving assets from the estate free of income taxes (see exception for retirement assets in the chart below). As a beneficiary, if you later sell or earn income from inherited assets, there may be income tax consequences.
The Executor must submit the Will and other important documents to the probate court, and then pay any outstanding bills and taxes. Once that's done, you can expect to receive a disbursem*nt of financial assets and transfer of ownership of any tangible assets.
In the case of a Will, you won't receive your inheritance until the probate process has concluded, which often takes several months to even a few years. In the case of a Trust, you will receive your inheritance as soon as the terms of the Trust allow.
As such, anything you own is distributed according to your state's laws. An executor is appointed in most states. This individual assumes the responsibility of paying off your creditors. Any money that remains is distributed to your spouse and children.
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Introduction: My name is Manual Maggio, I am a thankful, tender, adventurous, delightful, fantastic, proud, graceful person who loves writing and wants to share my knowledge and understanding with you.
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