Most of us have imagined what we might do if we received an inheritance someday. And in our imaginations, we tend to be pretty good at it. We know what we’d do with the money, what we definitely wouldn’t do, and how we’d make sure it changed our lives for the better.
It’s pretty easy to make smart financial decisions with money you don’t actually have yet.
But when an inheritance becomes more than a hypothetical, the decisions tend to get more complicated.
As a Certified Financial Planner, I’ve helped people work through many of those decisions. And while every situation is different, there are some questions that come up again and again.
In this inheritance Q&A, I’ll walk through seven of them:
Some of these decisions may have a clear answer for you. Others may depend on your financial situation, your family and what you want the money to make possible. The important thing is knowing what to consider before you decide.
The first decision may not be what to do with the money at all.
Before deciding whether to invest an inheritance, pay down debt or make a large purchase, start by looking at what the inheritance changes. A significant increase in your assets can affect much more than your account balance. It could change your retirement timeline, tax planning, estate plan, insurance needs and other financial goals.
That’s why it can be helpful to revisit your financial plan before making major decisions about the inheritance itself.
There may be opportunities you hadn't considered before receiving the inheritance. But moving too quickly can also lead to decisions you may regret later. Taking time to understand your new financial picture can help you decide what role the inheritance should play in your life and which decisions should come first.
Go back to the big picture first. Review your financial plan based on your new circumstances before making major decisions about individual dollars.
Maybe. But instead of asking, "Can I retire now?" consider asking, "How does this inheritance change my retirement timeline?"
The answer isn't determined by the size of the inheritance alone. Your age, the financial resources you already have, the lifestyle you're planning for and what you ultimately do with the inherited assets all matter.
For example, inheriting $100,000 at age 35 could be a tremendous financial help. But if most of it goes toward a new car and a vacation, it may have little effect on your long-term retirement plan. A larger inheritance, or one received closer to retirement, could have a very different impact.
An inheritance could potentially mean:
The important thing is to run the numbers rather than assume a significant inheritance automatically means you're ready to stop working.
Your goals, timeline and financial resources have changed. Your retirement plan may need to change with them.
Don't assume receiving an inheritance automatically means you can retire early. Revisit the assumptions behind your retirement plan and determine what your new financial circumstances actually make possible.
Paying off your mortgage can feel like an obvious, responsible use of inherited money. But the better question isn't simply, "Can I pay off my mortgage?" It's, "Is this the best use of this inheritance right now?"
There are several things to consider before using an inheritance to eliminate your mortgage, including how close you are to retirement, your mortgage interest rate and the other financial goals the inheritance could help you accomplish.
Paying off a mortgage can provide something that's difficult to measure on a spreadsheet: peace of mind. Eliminating a monthly payment may be especially valuable as you approach retirement or if being debt-free is important to you.
But there can also be a tradeoff. If you have a low-interest mortgage, for example, putting the inheritance toward another financial goal or investing some of the money for the future may create more value over time.
That's why paying off your mortgage with an inheritance isn't simply a debt or monthly budgeting decision. It's a broader financial planning decision.
Before paying off the loan, consider how that choice fits with your retirement plan, investment portfolio, income tax picture, estate plan and long-term goals.
Don't look at the mortgage in isolation. Compare the benefits of paying it off with the other opportunities the inheritance creates, then determine which choice best supports your overall financial plan.
This can feel like an uncomfortable question, but keeping inherited assets separate isn't necessarily about keeping money from your spouse.
In many cases, an inheritance begins as separate property. But combining inherited assets with jointly owned accounts or other marital assets can make maintaining that separation much more difficult later.
Keeping an inheritance separately titled also doesn't mean your family can't benefit from it. Depending on your goals, inherited assets could still help pay for your children's education, family experiences, retirement or other shared priorities. The difference is that maintaining separation may give you more flexibility over how those assets are ultimately used.
If keeping your inheritance separate is important to you, some of the issues to discuss with your professional advisors include:
The rules governing inherited and marital property can depend on your circumstances and applicable state law, so consider speaking with the appropriate legal and financial professionals before moving the assets.
And don't overlook the family conversation. A financial planner can help both spouses understand the planning considerations and keep the discussion focused on your shared goals rather than allowing an understandably emotional topic to drive the decision.
Decide how you want to handle inherited assets before moving or spending them. If keeping the inheritance separate is important to you, talk with your professional advisors about the appropriate steps and include your spouse in the larger financial planning conversation.
An inheritance held in trust can work very differently from receiving assets outright.
With an outright inheritance, the assets are generally yours to manage and use. When assets are inherited through a trust, the person who created the trust established rules governing when money can be distributed, how it may be used and what conditions may need to be met. The trustee is then responsible for carrying out those instructions.
Depending on the trust, distributions could be structured around:
The trustee could be a family member, trusted friend, bank or trust company. Their role isn't to create new rules for the inheritance. It's to administer the trust according to the terms established by the person who created it.
Why put those restrictions in place?
Every family's situation is different. Some trusts are designed to protect inherited wealth from creditors or divorce. Others are intended to keep assets from being spent all at once or to delay access until a beneficiary reaches a certain age or stage of life. Ultimately, the goal may be to help preserve family wealth so it can benefit loved ones for years to come.
Rather than viewing the trust only as a list of restrictions, understand it as the framework you're planning within. Start by understanding what the trust allows, when distributions can be made and how those assets fit into the rest of your financial life.
Yes. Formally choosing not to accept some or all of an inheritance is known as disclaiming an inheritance.
When you disclaim an inheritance, you aren't choosing a different asset or deciding who should receive the money instead. You're choosing not to accept it. The disclaimed assets then pass according to the applicable will, trust agreement or state law.
There are situations where the assets may be more useful elsewhere in the family. For example, depending on how the estate plan is structured, someone might consider disclaiming assets that would then pass to a surviving parent who needs them. A surviving spouse who doesn't need all of the assets left to them may have different considerations. In another family, financially secure adult children may consider whether assets could ultimately benefit the next generation instead.
But disclaiming an inheritance is not something to do casually. You don't control where the assets go simply by disclaiming them, and the decision is final and cannot be undone. It's important to understand exactly what happens next before making the choice.
Because disclaiming an inheritance can involve legal and tax considerations, talk with the appropriate financial, tax and legal professionals before taking action.
Before disclaiming an inheritance, understand exactly where the assets will go, how the decision affects everyone involved and whether it fits into the larger financial and estate plan.
Instead of thinking only about whether to give money to your children during your lifetime, consider another question: When could that money have the greatest impact?
People are living longer, which means your children could be in their 60s or 70s by the time they receive an inheritance. At that point, they may have already navigated some of life's most expensive milestones and could even be approaching retirement themselves.
Giving some financial help earlier could potentially make a difference when your children are:
Giving during your lifetime also gives you the opportunity to see the impact that help can make.
But there's an important caveat: your own financial security comes first.
If giving money today could create financial difficulty for you later in retirement, it may not make sense. There can also be value in allowing your children to work toward financial goals themselves.
Fortunately, it doesn't have to be an all-or-nothing decision. For example, an adult child may save toward the purchase of a first home while you decide to help them make a larger down payment than they could otherwise afford. You're helping them reach the finish line without necessarily funding the entire goal.
Look at where your children are in their lives, where your help could make a meaningful difference and what your own financial plan can comfortably support. Wealth transfer doesn't only have to happen at the end of your life.
There isn't one right answer for what to do with an inheritance because an inheritance doesn't exist separately from the rest of your financial life.
It may change your retirement timeline. It may affect your taxes or estate plan. It may create new decisions involving your spouse or children. And it may even change how you think about eventually transferring your own wealth.
That's why the common thread throughout these questions is to look at the entire financial picture before making individual decisions.
If you've recently received an inheritance or are preparing to transfer wealth to the next generation, a financial planner can help you understand the options available and how they fit into your larger plan.
Inherited wealth comes with a lot of decisions. It can also raise questions about how you'll eventually transfer your own wealth.
Our Beyond the Will Wealth Transfer Checklist can help you organize important details, communicate your wishes, and prepare your family for the future.
Download the Wealth Transfer Checklist:
Beyond the Will for Families
For informational purposes only. The information is not intended to provide specific advice or recommendations, and all investments involve risks, including the loss of principal.
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