What to do with your inheritance: understanding your options

By Joseph M. Dionisio, CFP®, Senior Wealth Strategist I Citizens Private Wealth

^{As a Senior Wealth Strategist, Joseph has more than three decades of experience working with high-net-worth individuals, families and business owners to provide comprehensive personal financial planning services.}

Receiving an inheritance can bring a mix of emotions — sadness over the loss of a loved one, gratitude for the inheritance and even surprise or uncertainty. Whether you receive a small sum or a large gift, what to do with your inheritance depends on the type of assets you're receiving and your overall financial goals.

No matter the size and shape of an inheritance, there's one thing that matters: thoughtful planning. When it comes to an inheritance, it's best to take your time with your decisions. You should carefully evaluate your options and make informed decisions based on your short-term and long-term goals. Here's how to approach it.

Step 1: Take stock of your inheritance

An inheritance could be anything from cash and real estate to investments, retirement accounts and family heirlooms. Once you know what you're inheriting, take an inventory of everything coming your way.

It's important to understand that there are different rules depending on the types of assets that are included in your inheritance. For example, the rules for an inherited IRA differ from those for taxable brokerage accounts and real estate. A financial planner or estate attorney can help you understand the rules for your incoming inheritance and help you create a plan to avoid pitfalls once everything is in your name.

Something to keep in mind is that it generally takes time to settle an estate, especially if probate is involved. Probate often takes nine to twelve months but can take longer depending on the complexity of the estate. You can use that time to work out the aforementioned rules and clarify your goals.

Step 2: Define your financial goals

While waiting for the estate to settle, think about where you want to go financially. You might want to pay down debt or add to or start your emergency fund in the short term. For the long term, you may have your eye on a college savings fund, building a retirement nest egg or boosting your charitable giving.

Whatever is important to you, now's the time to name it so you and your advisor can prioritize those goals and build a strategy to attain them.

Step 3: Explore your options for cash inheritances

There's no one right answer for what to do with inheritance assets or cash, but you have many options to consider:

• Pay down high-interest debt: Reducing debt can bring peace of mind and free up monthly cash flow.
• Save for a home or pay down your mortgage: A windfall could help you make a significant down payment on a new home or pay down an existing mortgage.
• Build or boost your emergency fund: A financial cushion can help cover unexpected expenses and prevent you from taking on high-interest debt when an unexpected or unpredicted expense happens.
• Contribute to retirement accounts: Consider maximizing your retirement plan contribution for the year to supercharge your savings.
• Fund education expenses: Whether for yourself or a family member, education is an investment that can yield lifelong returns.
• Make charitable gifts: Whether you make a one-time donation or establish a planned giving strategy, your inherited gift can empower you to give to others.
• Invest it for other goals: An everyday brokerage account can help you build wealth beyond personal and workplace retirement plans.

Of course, the right choice depends on your goals, risk tolerance and the type of inheritance you've received.

Step 4: Learn how to handle non-cash inheritances

Oftentimes, inheritances include other assets besides cash, such as retirement accounts, investments in brokerage accounts, tangible personal property or real estate. Each of these have their own set of rules and considerations.

For instance, what you can do with an inherited 401(k) depends on several factors, including the plan rules, your relationship to the original account holder and the age at which they passed away. Generally, you can roll the funds into an inherited IRA or take a lump sum distribution — though this may trigger taxes. If you're a non-spouse beneficiary, you typically need to empty the account within 10 years of the owner's death, although there are some exceptions, such as being a minor child or disabled beneficiary.¹

If the inherited 401(k) comes from a spouse, you have more flexibility, including the option to roll the funds into your own retirement account (spousal rollover). In that case, your required minimum distributions (RMDs) will start at age 73, unless your spouse had already started them.²

If you inherit real estate, you'll need to decide whether to keep, rent or sell it. Don't rush into a decision without understanding the whole picture and consulting a financial advisor who can help walk you through the process.

Step 5: Seek professional advice

Depending on the type and size of the inheritance, you may need guidance from tax, estate planning and financial professionals. For example, you could face inheritance, estate or capital gains taxes depending on where you live, what you've inherited and what you do with the inheritance.

At the federal level, currently, only estates worth more than $13.99 million are taxed at the time of the owner's death.³ This threshold is expected to drop to about $7.2 million in 2026 unless Congress acts.⁴ Some states also impose estate taxes, and others collect inheritance taxes — though these often include exemptions based on your relationship to the deceased or the amount.

If you inherit assets like a house or stocks, you may owe capital gains tax when you sell them. However, the asset's cost basis is "stepped up" to its fair market value on the date of the original owner's death.⁵ For example, if you inherit a stock portfolio valued at $100,000 and sell it two years later for $125,000, you'd owe tax on the $25,000 gain. However, you would not owe taxes on any of the gains that occurred while the original owner held the assets.

The rules can be complex and it's worth talking to financial and tax professionals, especially if you're inheriting a substantial sum. They can help you navigate the rules and find ways to minimize tax liabilities. Likewise, a financial advisor can offer strategies tailored to your life stage, helping you minimize any potential tax burden while integrating the inheritance into your broader financial plan.

Making a plan for your inheritance

Managing an inheritance isn't just about the money. It's about making choices that reflect your values and support your goals. Whether it's paying off debt, saving for the future or honoring a loved one's legacy through giving, there's no shortage of possibilities.

A trusted financial professional can help you take thoughtful steps forward and ensure your inheritance strengthens your long-term financial well-being. When you're ready to decide what to do with inheritance, don't go it alone — the right guidance can make all the difference. Connect with a Citizens Wealth Advisor* today.

Request a Call