Wondering What to Do with Inheritance Money? A Financial Advisor Shares Her Advice for First Steps

Kay Dee Cole

October 23, 2025

If you’re reading this article to try to figure out what to do with inheritance money, let me start by saying two things: 

  1. I’m sorry for your loss. Whether you were close to the person who passed away or not, losing someone is a difficult journey.
  2. Good job seeking help. You’re starting this journey on the right foot.

There is a strong temptation when you get a sudden influx of inheritance money to go buy something big that you’ve always wanted but could never afford. Maybe it’s a new car, maybe it’s a European cruise – whatever it is, the temptation is real and human.

But if you’re reading this article, chances are you understand that that may not be the best decision – and you’re right! That doesn’t mean that you can’t do anything fun with your inheritance funds, but it can have a much bigger impact on your life if you follow a few steps first.

In this article, I will share some basic steps on what to do after receiving an inheritance. 

But first, let’s do a quick primer on some important terms you should know.

Understanding the roles

If you’re inheriting wealth for the first time, you may be a bit confused. There are three terms you probably need to know:

  1. An executor is the person who makes sure that the intentions of the deceased are carried out according to their will.
  2. A trust is a legal arrangement where someone’s assets are managed and nominally owned by someone else for the purposes of estate planning.
  3. A trustee is the person who administers the property and/or assets of a trust according to the wishes of the person who created the trust. There may or may not be a trust involved in your situation.
  4. A beneficiary is anyone who is left something in the will. Whether you received jewelry, money, stocks, or precious heirlooms, you are a beneficiary.

Related: Beneficiary of a Trust? What You Need to Know

What Should You Do with Your Inheritance Money?

Receiving a sudden windfall can be exciting, but it’s important that you keep a level head and consider your next steps carefully. 

3 reasons you should talk to a financial professional first

Of course, an advisor would tell you to talk to an advisor first, right? Yes and no. There are three important reasons this should be your first step when you receive an inheritance:

Reason #1: Taxes

If you received your inheritance, there can be tax consequences depending on what you received. In the case of stocks and bonds, many accounts get a step-up in basis on the date of death. In addition, the presence of a trust may cause taxes owed when distributed to beneficiaries because it does not get a step-up in basis. It is usually caused by a bypass or marital trust (important to understand the trusts). A conversation with the attorney/advisor/tax accountant  could help you steer clear of a plus-sized tax bill. 

In addition, if you are retired and have upcoming required minimum distributions (RMDs), your inheritance could impact your tax liability.

(If this is you and you need an advisor ASAP, click here to schedule a call. We can help you figure out if there is anything you need to do right away.)

Reason #2: Emotions 

Inheritance funds can carry a lot of emotional weight. Spending the inheritance money could bring up feelings of disapproval or anxiety, freezing you into inaction.

Many advisors can help you sort through some of your feelings. Depending on your relationship to the deceased you can build a plan that honors your loved one and/or has a positive impact on you and your family – which brings us to reason number three.

Reason #3: Planning

Inheritance funds can have the power to change your life circumstances for the long term, but they require some careful planning.

When you receive a significant windfall of cash, you may feel the temptation to buy that new car you’ve always wanted or pay off your mortgage or pay for your children’s/grandchildren’s college tuition or something else.

If you spend a big portion of the money without a plan, you could be preventing yourself from being able to make a bigger change in your financial health. 

To be clear, I’m not saying you can’t buy the house or pay off your mortgage; I’m just saying you should get a plan in place first. 

If you’ve always handled your own finances, we would highly recommend seeking some professional help with taxes, money, or legal issues, if only for the first year – someone who can help you keep more of your inheritance, avoid any unnecessary tax penalties, and build a plan to maximize the impact of the money you received.

If you’re determined to go the DIY route, you should at least read the book Sudden Money by Susan Bradley and Mary Martin. They do an excellent job of laying out practical steps. You can also find podcasters and others, but do your due diligence as literally anyone can start a podcast or YouTube channel.

Assemble your team

If your inheritance is in the form of an IRA, Roth IRA or investments, you’re going to want help navigating the complexities that come with that. 

Related: 8 Ways Working with a Financial Advisor can Help Improve Your Life

Your financial team may look different depending on your needs, but you’ll want to look into getting:

    • A financial advisor acts as the “quarterback” of your financial team, using their holistic view of your financial life and goals to coordinate all of the different professionals together. Plus, they will help you build and stick to a plan for how to maximize the way you use the inheritance funds.
    • An accountant will help you manage any tax issues that may arise.
  • An estate planning attorney can help you with the legal part if you inherit wealth from someone. If the inheritance you received involved someone like this, that could be a good place to start. They can also help you update your own will and get other end-of-life issues taken care of for your family so you can leave a legacy you can be proud of.
    Related: What Will Your Financial Legacy Be?
  • An attorney. While you may not need an attorney on retainer, establishing a relationship with one can help you be prepared for any legal issues that arise regarding your inheritance.

If you inherited investments, decide what to do with those

When we work with clients who inherited investments, we could take one of two courses of action, we could either:

  1. Keep the money invested. If you don’t need/want the money right away, you may prefer to leave it invested. If this is the case, we will make sure the investments are balanced to match your risk tolerance and goals.
  2. Sell the investments. If you want to use the money sooner rather than later, then we’ll find the most tax-efficient way to sell the investments and then put it somewhere (typically a money market account) while we figure out the next steps. 

Fill up your emergency fund and pay off consumer debt

No matter what you decide to do with your inheritance money, you want to be sure to at least fill up your emergency fund. If your emergency fund has three months’ worth of expenses or less, take this opportunity to pump it up to six months, or even twelve. Paying off consumer debt like credit cards can go a long way in setting you up for success.

Make a plan

Take some time to think about how the inheritance funds could change your life in the big picture. Could you:

  • Eliminate all of your debt?
  • Catch up on your retirement savings?
  • Start a 529 plan for your grandchildren’s college education?
  • Start a scholarship at your alma mater?
  • Donate to charitable causes you care about?
  • Plan a family get-together 

With the right plan in place, you could possibly do all of that and more. But if you try to do it all at once, you’re going to either (a) run out of money or (b) pay way more in taxes than you should.

Keep it to yourself

Inheriting money can be exciting, and you may find that you want to spread the good news to anyone who will listen. We highly recommend keeping it between yourself and your spouse or another trusted loved one (and your team of professionals, of course).

Unfortunately, when someone inherits large sums of money, people start coming out of the woodwork asking for handouts. The best thing for you to do is keep the news to yourself – at least until you have a plan in place.

Whatever you do, plan first, then act

For more information on building a plan that will set you up for success, click here to download our ebook, “7 Rules to Retirement Planning Success.”

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Just Found Out You’re the Beneficiary of a Trust? Here Are 14 Questions & Answers You Need to Know

Just Found Out You’re the Beneficiary of a Trust? Here Are 14 Questions & Answers You Need to Know

If you have been named as a beneficiary of a trust, you probably have many questions about what comes next. Trusts can take many forms and may be governed by unique provisions established by the creator of the trust or “grantor.” As a trust beneficiary, you have certain rights. But to ensure that your financial and other interests are fully protected, you need some basic information about different trust structures and their management.

Trust Basics

At their most basic, trusts can be grouped into two broad categories – living trusts and testamentary trusts. A living trust is created by an individual during his or her lifetime. The grantor transfers property to a trust that is managed for the trust beneficiaries by a trustee. The grantor may act as trustee, or he or she may appoint another family member or family advisor, such as an attorney or accountant to be the trustee. A testamentary trust is established by will upon the death of the person whose assets it represents. Testamentary trusts can be used for many purposes; chief among them to provide for current and future beneficiaries.

In either case, it is the trustee who is charged with administering the trust in strict accordance with its terms. If this so-called fiduciary duty of the trustee is breached in some way, beneficiaries have the right to protect their interests by taking legal action against the trustee.

Role of the Trustee

Following is a brief overview of the trustee’s role and responsibilities.

• Asset collection and protection – Two of the trustee’s key responsibilities are collecting assets earmarked for the trust and ensuring the protection of those assets. For instance, if real estate is included as a trust asset, the trustee is responsible for the maintenance and upkeep of the property and maintaining appropriate insurance on the property. In the case of financial assets, such as cash or securities, the trustee must maintain one or more separate accounts on behalf of trust beneficiaries.

• Investment oversight – The trustee ensures there is a plan in place to address the needs and interests of current and future beneficiaries. Typically, trust investments are expected to generate income for beneficiaries while also retaining and reinvesting principal. In some cases, the trustee may have the authority to make distributions of principal to beneficiaries.

• Taxes – The trustee reports all income generated by trust assets and pays tax on any undistributed income as well as capital gains realized by the trust. In addition, the trustee informs beneficiaries of the amounts that they must report on their personal income tax returns as a result of trust distributions.

• Recordkeeping – The trustee is responsible for documenting every transaction that takes place in the trust accounts. Prior to final settlement, the trustee must demonstrate to the beneficiaries that all assets and income have been properly administered and distributed.

Beneficiary Right to Action

In addition to regular accounting of trust assets, beneficiaries have a right to request a special accounting from the trustee if there is reason to suspect a problem with the trustee’s performance of his or her fiduciary role. If it is found that the trustee is in violation of his or her responsibilities or fails to provide proper documentation of trust activity, then the beneficiary has the right to take legal action, including removing the trustee and requesting a replacement. Such action is normally handled by filing a petition with the local probate court.

Revocable vs. Irrevocable Trusts

Living trusts may be revocable or irrevocable. As its name implies, property held in a revocable trust may be “revoked” at any time; the terms of the trust may be changed and assets returned to the grantor. He or she can establish detailed instructions as to the handling of trust assets during his or her life and ensure continuity of management upon incapacity or death. Revocable trusts need not be filed in probate court after death, thus maintaining family privacy. However, the grantor will be subject to income and estate tax as if the property were owned outright.

In contrast, assets placed in an irrevocable trust are permanently removed from the grantor’s estate, and any income and/or capital gains taxes owed on assets in the trust are paid by the trust. Upon the grantor’s death, the assets in the trust are not considered part of his or her estate and are therefore not subject to estate taxes.

Irrevocable Trusts Offer Lifetime Giving to Beneficiaries

While requiring some loss of grantor control, a properly drafted irrevocable living trust allows individuals of substantial wealth to begin transferring assets to beneficiaries during their lifetime without incurring gift or estate tax. (Please note that a three-year survival period may be required in certan situations).

For example, the normal annual limit on tax-free gifts is $14,000 per beneficiary in 2015, an amount that may be indexed for inflation in future years. Under some circumstances, a taxpayer may include amounts above that in his or her unified estate and gift tax exclusion amount ($5.43 milliion in 2015 for an individual, twice that for a married couple, and subject to indexing for inflation in subsequent years). In addition, upon the grantor’s death, appreciation on the remaining trust assets is not subject to estate tax (assuming any three-year survival requirements are met).

Being named as a beneficiary of a trust is indeed a welcome event, but not without its complications and, if handled improperly, unfortunate consequences. For help understanding your rights and protecting your inheritance, it may be wise to engage the services of an experienced trust attorney.

Financial Planning Association
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