Personal finance: Ask these questions after receiving inheritance

Inheriting money often comes with a mix of emotions – ranging from anxiety and grief to anticipation and gratitude. And sometimes, the suddenness of such an event can make it a challenge to think clearly. As a beneficiary, how should you navigate these waters? Asking a few key questions can help ensure that you make the right choices in line with your values and life situation.

Ask these questions for an inheritance of any size

Is this going to change my lifestyle?

When one inherits money, it's tempting to make quick, significant life changes. It could be a new car or a bigger house. It could even be retirement. But before diving in, reflect on the permanence of these decisions. Is this inheritance sizable enough to support a lifelong lifestyle change? Also, working isn't just about income. It provides purpose, structure, and social interactions. If you're considering early retirement, weigh the non-financial aspects of work as well.

Am I looking at this to make me happy?

While sudden wealth can certainly bring comfort and luxuries, it's important to understand that real happiness is seldom tied to material gains. Relationships, experiences, and personal growth are the foundations of a fulfilled life. Money is simply a tool. Consider this inheritance as a way to support and enhance these aspects rather than replace them.

How can I honor the individual I inherited from?

An inheritance is not just a financial asset — it’s a legacy. Remember the person who left it to you. Would they have wanted you to use it for a specific purpose? Were there causes they were passionate about? By aligning some of your choices with their values, you not only honor their memory but also create a bridge between generations.

In 20 years, will I look back and be glad about what I did?

Time often provides clarity. Try to visualize the distant future. Will your imminent choices resonate positively two decades from now? Long-term thinking helps in prioritizing what genuinely matters.

Ask these questions for larger inheritances

Do I understand the tax implications?

Often, large inheritances come with a myriad of tax considerations. Here's a brief breakdown:

Estate taxes: Depending on the size of the estate and where the decedent lived, the estate may face federal or state estate taxes. These taxes are based on the estate's net value and can significantly reduce the overall inheritance.

Income taxes on inherited IRAs: If you inherit an Individual Retirement Account (IRA), you might have to take Required Minimum Distributions (RMDs), which can be taxable. The tax treatment varies based on the type of IRA (traditional vs. Roth) and your relationship to the deceased.

Capital gains tax: If you sell inherited property or stocks, there might be capital gains tax implications based on the difference between the inherited value and the selling price. A misstep or oversight can lead to sizeable tax liabilities. It’s important to align with a tax professional who can guide you through these intricacies. They can help ensure you remain compliant while optimizing your inheritance.

Am I OK to take it slow?

The excitement and the sense of responsibility that comes from inheriting significant wealth can feel like a wave carrying you toward immediate action. Major financial decisions, however, especially those impacting your long-term financial trajectory, merit deliberate thought.

Remember that while the inheritance might be sudden, the decisions you make around it don't have to be. By taking a step back, you allow yourself the space to process, understand the full spectrum of options available, and consult with experts. This measured approach can be the difference between building a legacy and suffering financial missteps.

Do I have a team of advisers to help me?

While it can be tempting to trust your instincts, there are many complexities surrounding large inheritances. That’s why leaning on an experienced team can be invaluable.

Attorney: Legalities around wills, trusts, and estates can be intricate. An attorney can help ensure all legal procedures are followed, rights are exercised, and potential pitfalls are avoided.

Accountant: With the multitude of potential tax implications, a seasoned accountant can help navigate the tax code and minimize your tax burden.

Financial adviser: Beyond immediate implications, there’s the broader picture of wealth management. How should you invest? What’s your risk tolerance? How can this inheritance align with your long-term financial goals? A financial adviser can analyze this information and provide strategies tailored to your unique situation.

Working with a team of experts isn’t just about managing the inheritance – it’s ensuring the continued health of the legacy you’ve inherited.

Explore your options

Inheritances present a wide range of opportunities, some of which include:

Giving it away: There’s a unique joy in philanthropy. Supporting causes or charities can create ripple effects in communities.

Gifting to others: Whether it’s setting up a college fund for a child or helping a friend in need, gifting can be a way to spread the wealth.

Using it for education: Knowledge is its own form of wealth. Consider courses or degrees that can enrich your life or that of a family member.

Paying off mortgage or debt: Financial freedom is liberating. Using the inheritance to eliminate debts can help you breathe easier.

Planning a family vacation: Travel not only provides a way to recharge your batteries, it’s also a way to create lasting memories.

Receiving an inheritance is as much a responsibility as it is a privilege. Money is a tool – often a very powerful tool – and can have a lasting impact on those around you. I wish you the best on your personal journey. 

Hunter Yarbrough, CPA, CFP, is a vice president and financial adviser with CapWealth. He is passionate about taking a holistic view of personal finance, including investments, taxes, retirement, education, estate planning, and insurance. For more information about Hunter and CapWealth, visit capwealthgroup.com.