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Managing an Inheritance: Your Financial Road Map Thumbnail

Managing an Inheritance: Your Financial Road Map

By Bryan Lee, CFP®, MBA 

Inheriting a large sum of money can feel like discovering a hidden treasure chest on your life’s journey. Just like a treasure chest, it holds immense potential, but unlocking that potential wisely is the key to turning it into a lasting legacy. 

Yet even with the best of intentions, important steps of this process can be easily overlooked, particularly while grieving. Managing a large windfall of money can come with its own complexities, which is why collaborating with an experienced financial advisor is a choice that may serve you well. Advisors can guide you through the intricacies and shed light on factors you may not have considered. Whether you’ve already received an inheritance or anticipate one in the near future, here are a few things to keep in mind.

Take a Moment

Before making any decisions about the money, you need to process the loss of your loved one. Failing to deal with your grief can result in emotional spending that compromises the money you’ve just received. If you give yourself some time, you may become more sensitive to your loved one’s wishes or have the chance to clear your head of complex emotions. 

If your loved one spent their life building and protecting their wealth, they probably hoped you’d do the same. Letting your inheritance sit for a minute can help you overcome the initial temptation to splurge on something like a fancy vacation or an expensive new home. It’s what we call a ‘decision-free zone’ after the passing of a loved one. If it’s important to you to honor their legacy, don’t forget to take care of your own emotions to steward the wealth they’ve gifted to you. 

Understand the Type of Inheritance You’ve Received

Common types of inheritances include:

  • Life insurance proceeds, cash, or other investments held personally
  • A retirement account such as an IRA, 401(k), or 403(b)
  • A house or other property
  • A trust account holding any or all of the aforementioned assets

Knowing and understanding the types of inheritance you’ve received impacts how you access the funds, any taxes associated with it, and what your options are moving forward. 

For example, if you inherit a home but don’t want to live in it, you may need to learn more about potential capital gains taxes before deciding to sell the property. Under current tax law, you would not likely owe much in capital gain taxes if you sold the home relatively quickly after it transferred to you since its tax basis would have been stepped up to its fair market value on the date of death. However, with the housing market we have seen recently, taxes could quickly rack up depending on how long the home is held before selling. If you find that a capital gains tax would be too costly, you might explore another option, such as renting out the house or living in it as your primary residence for 2 years in order to exclude some of the gains from taxation. 

Likewise, inheriting a retirement account comes with its own set of considerations, particularly if you inherit the retirement account from a non-spouse. Due to the SECURE Act 2.0, required minimum distributions (RMDs) may begin the year following the death, and generally, the account must be liquidated within 10 years. Depending on the size of the account, these distributions could cause your taxable income to spike in given years and push you into a higher tax bracket.

Regardless of the inheritance you receive, it’s best to contact a tax-planning or financial professional who understands the intricacies of inheritance situations. 

Take Stock of Your Financial Situation

Once you understand the type of inheritance you’ve received, you’re better equipped to align your plans for the inheritance with your other financial goals, which might include: 

  • Contributing to your retirement account
  • Paying down your mortgage
  • Saving for your children’s college education
  • Giving to a charity or foundation you care about
  • Buying a vacation home or taking your family on vacation

Since the receipt of the inheritance was likely not planned, creating a rule to allocate the funds between taxes, enjoyment, paying down debt, and investing for your retirement could make sense. For example, you might want to pay off your student loans, take a vacation to a place that your family has on the bucket list, and use some amount to help you fully fund your retirement plans and IRAs. Just be sure to engage with a financial professional and/or tax advisor to assist with holding back enough funds for taxes depending on the type of funds that were inherited.

Get the Support You Need

When you’re dealing with big financial decisions such as an inheritance, it’s wise to seek guidance from a professional for added support. A reputable financial advisor can offer seasoned advice, reducing the risk of making quick decisions. Beyond that, they can also help you make the most of your windfall, increasing the likelihood of a successful financial future while minimizing any tax surprises.

At Strategic Financial Planning, Inc., our main goal is to provide clients with a clear sense of direction and confidence around their financial picture. We are dedicated to helping you overcome financial challenges while customizing our services to align with your unique circumstances. If you’re ready to meet with a financial advisor who is committed to your best interests, don’t hesitate to get in touch with us today. Call (972) 403-1234 or contact us online to set up a complimentary get-acquainted meeting so we can see if we are a good fit! 

About Bryan

Bryan Lee is the founder and president of Strategic Financial Planning, Inc., an independent, fee-only financial advisory firm. With more than 27 years of industry experience, Bryan uses a unique client-first financial life planning approach and process to help his clients get the most out of life. Bryan earned his Bachelor of Business Administration in finance and his MBA in international finance from the University of North Texas. He is also a CERTIFIED FINANCIAL PLANNER™ professional. 

Bryan is actively involved in his community and industry and has served on the boards of several associations and charities, including the Dallas/Fort Worth chapter of the Financial Planning Association, the National Association of Personal Financial Advisors, Family Services of Plano, the CITY House, and the Journal of Financial Planning. Bryan has been featured in local and national media, including The Wall Street Journal, Investors Business Daily, CNNfn, USA Today, SmartMoney, Kiplinger’s Personal Finance, Financial Planning Magazine, The Dallas Morning News, and Dow Jones Newswires. And, he has been recognized as a Five Star Wealth Manager and one of Dallas’s Best Financial Planners in D Magazine every year since its inception and recently as a Top Wealth Manager. To learn more about Bryan, connect with him on LinkedIn.