Tips to Manage Inheritance to Maximize Your Financial Growth

A family sitting down with a grandmother explaining legal documents to her family. Open discussion is a good way to help younger generations manage inheritance.

Trillions of dollars are expected to pass in the coming decades from the Baby Boomer generation to their heirs—a staggering sum that begs the important question: How do you manage inheritance?

Even with so much money set to change generational hands, inheritance amounts range widely, and most of us probably can’t expect a life-changing sum of money from our parents. A moderate inheritance, however, requires some financial savvy to make the most of your financial gift. Tax implications, estate consequences, and other factors all must be considered when money is left to next of kin, so let’s take a look at a few quick tips on what to do with an inheritance and how to make sure you’re not breaking the bank by filling it up.

First Steps to Manage Inheritance

When managing inheritance, a few immediate decisions need to be made. Before making big financial decisions like moving, making a large purchase, or giving any of it away, you must develop a realistic picture of your overall wealth. The average inheritance in the U.S. comes out to about $40,000—an amount that can seem like a huge windfall—but considering your overall assets and liabilities might make buying that vacation home a little less realistic.

It’s essential to schedule a meeting with a licensed wealth advisor to get a professional analysis of your overall financial reality when receiving an inheritance of any size. Any strategy for maximizing your estate relies on important factors like whether you have complete control over the assets immediately. Some assets are held in a trust for you to be dispensed later or under certain conditions, while other assets have been willed to you as cash, stocks, real estate, or other personal property.

Often, an inheritance arrives in the middle of a grieving period—emotions that can complicate navigating the financial and legal processes that dictate what happens with your money. It’s best to take your time before deciding what the money “should” be used for. Any immediate cash disbursements can be deposited in a federally insured credit union like Greater Nevada Credit Union, which is insured for up to $250,000. Make that deposit in a separate account to give you the time to heal and approach any financial hurdles with the required care.

Working With Trusts and Trustees

Sometimes, inheritance is held in a holding account called a “trust,” which only disburses the assets when certain conditions are met. Trusts are managed by a “trustee,” who is chosen by the person leaving the inheritance and is usually another parent, family member, a family friend or advisor, an attorney, or a bank representative.

Trusts sometimes come with complex legal conditions that define when they are paid out, so any inheritance that comes through a trust greatly benefits from oversight by a lawyer. Lawyers can spell out the terms of the trust so you understand how and when you will receive the assets and help you avoid any penalties for breaking those conditions. Some trusts even allow beneficiaries to make changes—but only a lawyer can tell you the proper process for enacting such changes.

Trustees operate under a wide range of discretion imparted to them by the person who left the will, and any beneficiary would do well to open transparent and effective discussions with their trustee. Certain trusts dictate that trustees must distribute assets yearly, for example, while others grant autonomy to the trustee to decide where and when disbursements are made. Working with a wealth planner can help you to understand your financial relationship with your trustee and make a plan to navigate the conditions imposed on your inheritance.

Taxes are Inevitable

Managing inheritance almost always means managing the tax provisions of that money as well. Without getting too deep into the vast amount of tax law in the U.S., know that what you owe in taxes when collecting an inheritance is primarily decided by the state laws governing where the will is created.

Nevada is one of 38 states that does not enforce an estate tax (collected from the deceased’s estate when they pass) or an inheritance tax (imposed on the beneficiaries of an inheritance as soon as it is collected). However, while Nevada is a very tax-friendly state regarding inheritance, other factors may incur taxes when money starts changing hands.

For example, even though inheritance isn’t subject to income tax, income from inherited assets may increase your tax burden over time. Talking to an accountant or CPA can help you find various ways to lessen your tax burden by adding inherited assets. Some ways to avoid additional taxes include:

  1. Setting up a marital trust
  2. Setting up an irrevocable life insurance trust
  3. Setting up a charity trust
  4. Making gifts to individuals and/or charities

Pay Off Debts Before Splurging

They’re the oldest cliches around when considering what to do with an inheritance: buy a boat, spend the year in Italy, buy a solid gold toilet, or put it all on red. But the temptation to splurge on an extravagant purchase with a newly acquired inheritance is almost always misguided.

Instead of dropping a load of cash on a big-ticket item—even a more practical one like a new home or car—most Americans would be better served in the long run by using inherited money to pay down debts or other liabilities inhibiting their financial security. High-interest debt, such as credit cards or student loans, should be the priority, while lower-interest debt is subject to how comfortable you are carrying it on your balance sheet.

Invest the Rest

Managing inheritance responsibly doesn’t mean never buying something you want or need. There are ways to put that inherited wealth to work, contributing to your long-term financial stability. Investing an inheritance is almost always smart when done through proper channels and with realistic goals in mind. Use established investment principles like proper diversification, and don’t feel you need to put the entire amount into your portfolio all at once.

Investment doesn’t just look like a hefty stock portfolio, though. Investing in a Roth Individual Retirement Account (IRA), 401k, or other retirement account can provide financial stability and even an early retirement in some cases. Likewise, investing in a tax-advantaged 529 college savings account can set your child up for academic success in the future. You could also invest in short-term accounts, like one of our Share Certificates (CD) options meant to generate short and medium-term gains. Use our online CD calculator to start figuring out which options might be right for you.

You can also consider a more fluid option like our Aspire high-yield checking account, offering a great interest rate on a high cap amount so that your money is earning a lot while still being quickly available for life’s needs.

In whatever way you choose to invest, your future self will almost certainly thank you for managing inheritance with growth in mind instead of gratification.

If you have specific questions about what to do with inheritance, investment strategies, tax concerns, or anything else, the professionals at Greater Nevada Credit Union are only a phone call away. Our professional financial advisors can help you make the most of your inheritance, so call today!