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How to Prepare for an Inheritance


According to CNN, American retirees expect to leave an average inheritance of nearly $177,000 to their heirs. As tempting as it may be to pay cash for that cherry red Ferrari you had a poster of during your teenage years, it’s important to be strategic with a significant windfall. This amount of money, when used properly, could mean getting out of debt, covering the kids’ college education, retiring early, or a combination of all these. Consider the following steps when you learn of an upcoming inheritance to ensure that every dollar will benefit your and your family’s future.

Get Organized

Preparing for an upcoming inheritance is a great reason to organize your personal financial life. Start by taking inventory of your own investment and savings accounts. You’ll want to understand how your accounts are registered. For example, do you own and save into a 401(k) or 403(b) through your employer? Do you have a Traditional or Roth IRA that you manage? What about taxable investment accounts? Are these owned individually or are they jointly-owned with a spouse or partner? This will not only help you understand how you should deploy your inheritance, but it will help with the transfer process. Depending on how the inherited accounts are taxed, certain accounts need to be transferred into “like” accounts upon inheritance. For example, if you inherit a Traditional IRA from a family member, you have a few options for taking that distribution, and many people will choose to establish an Inherited Traditional IRA to use for their own retirement. Keep in mind if the person who passed away was over the age of 70.5 (and currently taking Required Minimum Distributions - RMDs), then you will be required to continue taking RMDs from your new Inherited Traditional IRA based on the decedent’s life expectancy.

This is also a good time to build a personal financial plan if you don’t have one already. This will inform on the best decisions to make with your inheritance and ensure that you are maximizing every dollar for you and your family while honoring the legacy of whomever passed it on to you. Your plan should detail your cash flow, investment strategy, savings needs, debt pay-down, cash reserve target, insurance gaps, and tax strategy, among other things. By getting organized and having a plan, you’ll know with confidence how you should deploy the inheritance to fill in any gaps with your personal financial plan. This could ultimately mean retiring early or getting rid of looming debt to better your situation.

Build A Rockstar Team

Inheriting money can be a complex and, oftentimes, emotional process. There’s no reason you need to do it alone. Consider hiring outside help in the form of specialized experts to support you with the logistics of your inheritance as well as to create an efficient and long-term plan that will ultimately benefit you and your family. A little accountability to stick to your plan doesn’t hurt either. The following professionals can play a unique and impactful role in helping you transfer and eventually utilize your windfall:

Financial Planner

If you don’t already work with a financial planner, now is a good time to explore your options. I highly recommend you seek out a fee-only, fiduciary planner whom will always act in your best interest. A planner will look at your current financial situation and help you incorporate the inheritance to ultimately put you in a better position to reach your own goals. They will help you understand how to transfer accounts most efficiently and where certain funds need to eventually go as well as how to incorporate the new investments into your own personal investment strategy. They can help you avoid unnecessary tax implications from transferring the assets into your name and discuss how to protect and grow your net worth. Last but not least, they can provide direction on your own estate planning needs and help you determine how a trust or living will, for example, may benefit you.

Estate Planning Attorney

An estate planning attorney can help guide you through the estate settlement process which could last several months or even longer in some cases. They will ensure that you are taking the right actions with newly-created accounts in anticipation of your inheritance. Additionally, they can help you create your own estate plan which may include creating a will or trusts, among other things, that may benefit your legacy goals while mitigating potential tax burdens.

Tax Professional

Hiring a CPA or tax professional when you inherit money will allow access to specific advice on how to potentially distribute the funds or of the most effective ways to transfer them into your name. They can also work with your financial planner to help you understand any Required Minimum Distributions you must take as a result of your inheritance. While working with a tax professional through your inheritance, it may also benefit you to seek additional advice on your own personal tax situation and lean on them for support with filing your taxes, as an inheritance often means a lot of moving parts.

Pay, Save, and Spend

Everyone’s personal financial situation is as unique as your potential windfall. Your use of any inheritance can be strategized and justified through a comprehensive financial plan that’s tailored to your future goals. That being said, many investors that experience a windfall can generally benefit their situation by using the new funds in the following order:


If you have outstanding debt at the time of receiving an inheritance, it’s often a good place to start when considering how to use the funds. Keep in mind that it will often make the most sense to leverage inherited taxable accounts to pay down debt as opposed to tax-deferred accounts, such as IRAs, for tax saving purposes. Look first to debt with higher interest rates and unsecured debt such as credit cards that are not tied to an asset such as a car loan or a home mortgage.


Nobody wants to hear that they should save more, but socking away a lump sum of money that was not originally accounted for in your financial plan can have a dramatic effect on your retirement and net worth projections. First, ensure that your cash reserve is properly funded. Check out this article to learn the right amount for you and how to optimize your emergency fund savings. Next, consider earmarking additional funds towards your retirement or other long-term goals. If the money you inherit was in an IRA or other tax-deferred account, this can be an easy transition to begin leveraging that money in own retirement plan.

In this step, it’s also important to incorporate the new accounts into your personal investment strategy. If you’re new to investing, check out what to consider when getting started. Many heirs receive an inheritance from an older family member whom may have been invested much more conservatively given his/her shortened time horizon and lower tolerance for risk. Don’t make the mistake of holding on to the same securities that the decedent owned (unless it makes sense for your situation), as this can turn into a hindrance towards achieving your own personal goals.


There’s nothing wrong with living a little if you are spending within your means. If your financial plan allows for some immediate spending, then taking your family on a trip or trading in your car with 150,000 miles might be in your best interest. It’s important that you understand the tradeoffs that these purchases will have on future cash flows and net worth growth so you know you’re making a prudent decision. Also, be strategic with the accounts from which you are funding these types of purchases. It may be best to first look at taxable accounts as opposed to tax-deferred accounts, for example, in order to mitigate any potential tax liability on the withdrawal for major purchases.

The bottom line is, inheriting money can be a complex, lengthy, and emotional process. It’s important that you know how your inheritance will fit into your personal financial situation so you can best utilize your windfall. Additionally, hiring your own dream team of professionals can help you get organized and give you the confidence that you are taking the right steps for your and your family’s future while honoring the legacy of whomever chose you to receive their hard-earned savings.

Are you in the midst of an inheritance or feel the need to organize your personal financial life? Reach out to me at or schedule a free consultation call.

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Ben Smith is a Whitefish Bay, WI fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional serving clients in the greater-Milwaukee, WI area as well as virtually across the country. Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI). Ben acts as a fiduciary for his clients. He does not sell financial products or take commissions. Simply put, Cove Planning sits on your side of the table, and always works in your best interest. Learn more how Cove Planning can help you Do Well While Doing Good!

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Ben Smith, and all rights are reserved. Read the full Disclaimer.

Ben Smith