4 smart things to do when you get an inheritance

The passing of a loved one is an emotional time. While processing everything, you may also find out that you’re receiving an inheritance, and knowing what to do with an inheritance can bring its own stress.

Financial experts predict that in the next few years American baby boomers will give trillions of dollars to their heirs, according to Fortune. Many households will receive major inheritances, but the money can be gone quickly without a good plan. If you receive an inheritance, take time to think about how you’ll manage the money. Giving yourself a moment to consider your options can help you avoid the urge to spend it all at once.

Even if you wouldn’t immediately spend it, you might still be asking, “What should I do with my inheritance money?” Here are four smart things to do when you get an inheritance:

Deciding what to do with an inheritance can create mixed emotions. There’s often a sense of relief for this unexpected financial gain, says Robert Pagliarini, CFP®, president of a financial planning and investment management firm. But there’s also sadness for the loss of a loved one.

During this time, you might feel confused and overwhelmed. “A large inheritance that pushes you out of your financial comfort zone can create anxiety about how to best manage the money,” Pagliarini says. He adds that you may feel the need to be extra careful with the funds. Even though you know it’s your money, it could feel borrowed.

The last thing you want when deciding what to do with an inheritance is to make major decisions while you’re still processing your emotions. Avoid making any drastic moves right away, such as quitting your job or selling your home. Some experts suggest giving yourself six months before using any of your inheritance. Instead, take that time to create a financial plan.

While you’re thinking about what to do with an inheritance, one thing you may want to do is put funds in a high-interest rate savings account or certificate of deposit (CD). Opening a 360 CD from Capital One, for instance, allows you to lock in a rate that’s above the national average. As a result, your savings grow steadily over time.

As you consider smart things to do when you get an inheritance, you need to know what you’re getting. Wealth planner Alex Caswell, CFP®, says how you use your inheritance will largely depend on its source. 

Caswell says an inheritance typically comes in one of three forms:

• Real estate, such as a house or property. As the inheritor, you generally have several options for the property. 

• A trust account is a legal arrangement where the inheritance goes into a special account managed by a chosen person, called the trustee. The creator of the trust is known as a grantor. “If someone inherits assets through a trust, the trust documents will stipulate how these assets will be distributed and who ultimately decides how they are to be invested,” Caswell says. In some cases, the inheritance is given to you right away; in others, the trust stays intact and you get paid in installments.

• A retirement account, such as an individual retirement account (IRA), Roth IRA or 401(k). These accounts can be distributed in one lump sum. Keep in mind that there may be requirements for when you must take out money and how much you must take.

Inherited assets may be designated as Transfer on Death (TOD) or beneficiary deeds, which can allow them to pass directly to beneficiaries. What are these deeds? 

• Transfer on Death (TOD) deed: A TOD lets certain assets, like bank accounts or investments, pass directly to a named beneficiary after the owner dies.

• Beneficiary deed: A beneficiary deed lets real estate transfer directly to a named beneficiary after the owner dies.

An inheritance can include cash or personal valuables, such as jewelry and family heirlooms. Other assets, including stock certificates and the proceeds from life insurance policies, may also be passed on to beneficiaries.

Caswell says if your inheritance comes in the form of investment assets, you’ll want to think of them as part of your own financial picture. These assets might include stocks or mutual funds. “All too often, we see people end up treating inherited assets as a living extension of their passed relative,” Caswell says. One of the smart things to do when you get an inheritance is to consider how investments can be used to support your financial goals.

Just like with your household budgeting, you can “assign” your inheritance to specific goals, Pagliarini says. As you plan what to do with your inheritance, here are three different categories to think about. Focusing on saving, spending and giving can provide a helpful starting point as you decide how to use your inheritance.

How it works:

Save:

• Add to your emergency savings account: Aim to have three to six months of living expenses saved in case something unexpected happens, like losing your job or needing to repair your car. The right savings account can help you keep your emergency fund secure and accessible while giving your money an opportunity to grow. 360 Performance Savings from Capital One, for instance, offers a high rate to help your balance grow.

• Save for big goals: Now could be a good time to boost your long-term savings goals. Putting money toward a child’s college fund or getting your retirement savings on track are some smart things to do when you get an inheritance. With a Capital One Kids Savings account, you can kick start your child’s college fund and earn a high rate on their savings with no monthly fees or minimums.

Spend:

• Tackle debt: If you’re deciding what to do with an inheritance, consider paying off high-interest debt. Spending on debt repayment can help you save on interest charges.

• Reduce or pay off your mortgage: Getting closer to paying off your home can save interest and lower your monthly expenses. That means putting cash here is a win-win.

• Enjoy it: It’s okay to use part of your inheritance on something you enjoy. For instance, you might use a portion of your inheritance to plan a vacation. You could also invest in your education or give a special gift to a loved one.

Give:

• Donate funds to charity: Thinking about the causes that mattered to your loved one—or to you—can help continue their legacy. Giving to charity may also provide tax benefits, depending on your situation.

When deciding what to do with an inheritance, you’ll need to consider taxes. “It’s important to be aware of all tax ramifications of inherited assets,” Caswell says. You could be required to pay a capital gains tax if you sell the gift that was passed down to you, for example. Also, depending on where you live, your inherited money could be taxed. In addition to federal estate taxes, you’ll have to pay an inheritance tax and/or an estate tax in several U.S. states.

Since every situation is unique and tax laws can change, consult a financial advisor or tax professional for guidance.

Receiving an inheritance can change your financial picture, but thoughtful decisions take time. Give yourself space to process your loss before making major financial decisions. A thoughtful plan can help you care for your financial future while honoring your loved one’s legacy.

Here are four smart things to do when you get an inheritance:

• Giving yourself time to grieve and process your loss can help you approach financial decisions with more clarity.

• Taking time to understand what you’ve inherited can help you see how those assets might support your goals.

• A thoughtful plan for saving, spending and paying down debt can help your inheritance stretch further and work harder for you.

• Consulting a financial professional or tax advisor can help you move forward with greater confidence.

Once you’ve decided how you want to use your inheritance, having the right financial tools can help you put your plan into action quickly. Capital One made opening a 360 Performance Savings account easy enough to do in about five minutes.