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Inheritance Basics: What to Do with Inheritance Money

Receiving an inheritance following the death of a loved one can be bittersweet. All too often, beneficiaries put undue pressure on themselves to make quick decisions and start spending and investing money right away. 

It’s important to take your time, do your research, and make sure you understand the options available to you when deciding what to do with your inheritance money.

How Does Inheritance Work?

When someone passes away, ownership of their assets is transferred to beneficiaries through inheritance. Inheritance can include money, real estate, stocks and bonds, vehicles, jewelry, and other tangible assets. Oftentimes, the details of who receives what and how the assets will be transferred are determined ahead of time and laid out in a will. In cases where these arrangements are not made in advance, a probate court gets involved to determine how the assets are distributed.

Do You Have to Pay Taxes on Inheritance?

There is no federal inheritance tax, and only six states currently impose a tax on inheritance, which many beneficiaries are exempt from paying. Estate taxes, which are levied on the value of the estate prior to any assets being transferred to beneficiaries, do exist at the federal level and in 18 states. However, in most cases, they only apply to very large estates.

More relevant to the average beneficiary are capital gains taxes. If you inherit real estate, stocks and bonds, or other appreciating assets, you may owe capital gains taxes on the property if you decide to sell it. However, you aren’t required to use the original cost basis (the amount your loved one originally paid) for property you inherit. Inherited assets often receive a “stepped-up basis,” equal to their market value at the time of the decedent's death.

What is Considered a Small Inheritance?

According to a recent report, the median inheritance in 2016 was $55,000, so inheritances below $20,000 could be considered “small.” Yet this is still a substantial amount of money and can be used in a variety of ways to improve your financial situation.

What to Do With a Small Inheritance

One of the first things to consider when deciding what to do with your inheritance is evaluate your debt situation. Paying off debt, especially high-interest or high-balance debt, saves you money, doesn’t involve the risk that comes with some other options, and sets you up to have more financial flexibility in the future. If you don’t have debt to pay off, consider setting up a rainy-day fund, or potentially investing it in your retirement account

What is Considered a Large Inheritance?

Large inheritances vary considerably, but it’s safe to say that anything over $100,000 falls into this category. Whether you inherit a hundred thousand dollars or upwards of a million, a large inheritance can feel intimidating, especially if you don’t already have substantial wealth built up.

What to Do With a Large Inheritance

As with smaller inheritances, the first thing to consider when you inherit a large sum of money is whether or not you have debt that needs to be paid off. It’s generally a good idea to make that a priority. From there, you can begin to consider your investment options. What makes most sense for you will depend on your existing financial situation, your financial goals, and your risk tolerance.

What to Do With Inheritance Money

Inheriting money can be overwhelming. It’s important to make sure you don’t rush when deciding what to do with it. If you don’t already have a clear picture of your finances and a list of clearly defined financial goals, now is the time to get a handle on your situation. It’s a good idea to sit down with a professional who can help you understand the basics of financial planning and help you determine how your inheritance can help you achieve your unique goals.


The Team at Chatterton & Associates

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

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