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A 90-day action plan to determine what to do with your inheritance—how to evaluate, save, invest it and more.
Disclaimer: The information provided is not intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. We encourage you to seek specific advice from your personal tax or legal counsel.
Losing a loved-one such as a parent can feel impossible. Not only emotionally, but also, although less so, logistically when considering the many financial to-dos.
We’re here to guide you through the financial logistics of inheriting money or assets. First, we'll help you identify what to tackle first, and which items can wait until after you've had some time to grieve and cope. Second, you'll learn how to navigate how an inheritance can affect your overall financial situation, including your net worth snapshot, cash flow, investments, debt, savings, taxes and your own estate plan. We'll help you understand how an inheritance will impact each of the ten themes of financial planning, what we recommend you do, and when.
We know it's hard. But, we can at least guide you through the logistics.
Our experience
Over the years, we’ve had clients, and children of clients, come to us for advice regarding a recent inheritance. Many have been visibly overwhelmed and feel like a deer caught in headlights. Understandably so, as an inheritance can profoundly impact our personal finances and leave us with a deeply emotional responsibility to “do the right thing, at the right time” with the funds. We’ve found that prioritizing inheritance to-dos into digestible 30-day, 60-day and 90-day items can remove some of the stress and burden.
The action plan
Assuming the estate has been settled and assets have been distributed, you may be looking at more investments than you’ve ever had, and perhaps more cash than you’re used to having. And, you may be wondering: What do I need to do first? Keep these positions? Sell these positions? Buy stocks? Buy mutual funds? Pay off my mortgage? Max out the kids’ college plans? Hire an advisor? Fire the advisor? Decrease my life insurance? Increase my life insurance? When should I reevaluate all of these decisions?
Phase 1, First 30 Days: Evaluate Everything, Buy and Sell (Nearly) Nothing
The first 30 days after you receive an inheritance should be about evaluating and understanding your full financial picture. During this time, we recommend not rushing into purchasing any big ticket items, or making substantial monetary commitments like paying down a mortgage, buying a house, maxing out kids’ college funds or major investments. If possible, consider leaving any inherited investment positions as they are (within reason, and please a professional to discuss this in detail if you have any questions) to allow yourself time to evaluate what you have.
Snapshot: Commit to conduct a deep review of your finances. Pull up to the table with a big cup of coffee and look at what you have. Have each account statement available and assemble a detailed list of every asset you have, including newly inherited items (e.g., cash accounts, investment and retirement accounts, real estate, kids' college plans, bonds) and liabilities (e.g., personal debt, credit debt, student debt, mortgage/real estate, auto debt). We recommend you use the net worth snapshot in the Pocketnest app to ensure you account for everything. For each piece of debt, you should know the remaining balance, payment terms, and the interest rate.
Budget: Review your cash flow before and after you received inheritance. If you’ve already created a budget, you probably know how much extra or deficit you have each month and where any extra funds should go. If you haven’t created a budget yet, now’s a good time to start. We also recommend you use the Pocketnest app to create your budget, so you know where, and how much of the inheritance you should spend.
Insurance: Consider insurance on any substantial collectibles like art or jewelry if you've inherited any significant pieces.
Investments: Consider not making any substantial changes in any inherited investment account in the first 30 days of inheritance to allow for time to evaluate and analyze your full investment portfolio. It's also a good time take a step back, digest what has happened, and get things in order.
Phase 2, Next 60 Days: Make The Plan
The next 60 days are about making a plan for your investments and overall finances, and taking small steps to implement it. At this point, you should know where your assets are, how much they are, and how much (more or less) is in each account. You should understand how accounts are titled (outright in your name, in IRAs, or in trust; these titles are typically listed on each statement and have different tax impacts when withdrawing cash from them) and what is accessible to you for spending or saving.
1. Snapshot and Budget: By now you have a sense of what you have and how much you spend. And, you may be asking yourself Where does the next dollar go? If you’ve inherited money, do you know where it should go (e.g., savings, retirement, college plans, paying down debt, emergency cash reserve)? We recommend tackling things in the following order:
Pay down expensive debt such as high interest credit card or personal debt. And pay off your credit cards each month, no excuses!
Build an emergency cash reserve. You never know when you'll need to pull cash from your rainy day fund.
If you have student debt, make a plan to pay if off.
Save for retirement by maxing out your employer retirement funds to at least get the “free” employer match. And, if possible, put the maximum amount allowable by the IRS into your account each year. Consider allocating funds to other tax deferred accounts like IRAs if you are eligible.
Plan for college savings. Know how much your kids will need for college and then decide how much you want to contribute to their education. Come up with a plan to allocate funds to their college savings accounts every month.
Evaluate paying down your mortgage or refinancing your mortgage. Review your current (and perhaps floating) interest rate, what you pay each month, what the payment terms are and if you have any prepayment penalties. Compare your interest rate to current mortgage rates, and what you could make if you invested excess cash in the market. Typically, this decision ends up being a emotional one, not a financial one. Most people simply want to pay off their mortgage so they can be debt free, even if they think they can make more by leaving that capital in the investment markets. We’re a fan of debt free and the markets. This decision is a personal one.
2. Insurance: Consider changing how much life insurance you have. You may be able to decrease or eliminate it by self-insuring. This allows your assets to provide for your loved ones, instead of insurance, after you pass. We've also seen people increase their life insurance after an inheritance, believing more assets will be required to keep up with a new standard of living.
3. Investments: If you’ve inherited a portfolio of investments like stocks, bonds or mutual funds now is the time to take a deep dive into evaluating what you have.
First, understand what you are invested in (if they are mutual funds, individual stocks or bonds/bond funds), if you're comfortable with the holdings, and if the overall asset allocation mix is appropriate for you.
Determine your asset allocation and risk. Many times we see inherited portfolios having a more conservative allocation (more weighting to conservative fixed income or bonds, than riskier stock or equity positions) than what would be appropriate for a younger, inheriting heir. However, we strongly caution there is no right answer to what someone’s allocation should be based on their age. This is a decision people must make on their own. There are a lot of free tools out there to determine an appropriate asset allocation mix for you based on your comfort, portfolio size and overall risk tolerance.
If you have inherited an IRA, you must follow the distribution rules to avoid costly distributions. You will have to take a required minimum distribution each year. Your IRA custodian can you assist with this transaction.
4. Income Tax: If you have inherited a substantial amount of inheritance, it may impact your taxes. This is because your assets may put you into a higher income tax bracket. Consider chatting with a professional to understand this completely.
Phase 3, 90+ Days: Execute The Plan
The last phase of navigating your inheritance is finalizing and executing your plan, and developing a process to monitor your financial situation.
Budget: You should know where that “next dollar should go” and execute this plan. If you’ve paid down all expensive debt, student debt, are maxing out retirement accounts, and want to add funds to your children’s 529s, then set up a plan to do that regularly.
Estate Plan: Revisit your own estate plan. If you've inherited significant assets, it's important that you review your estate plan to determine what documents you’ll need in place.
Insurance: Consider umbrella coverage. We also recommend that you revisit your home / auto coverage if you’ve inherited significant assets, as it may impact the most appropriate deductible and coverage.
Investments and Retirement: Devise a plan to continue to monitor your investments and retirement plan. You’ll need to keep an eye on your overall allocation as the markets move and overtime as you near retirement.
It is important to understand that nothing in this content should be considered personalized investment, financial, tax or legal advice.