How to Handle an Inheritance Without Losing It

In this article, Don James explains how to manage a sudden inheritance wisely, covering everything from understanding your assets to setting up a long-term investment strategy.

A Massive Wealth Transfer Is Underway

Boston College economists John J. Havens and Paul G. Schervish estimated some years ago that wealth of somewhere between $41 trillion and $136 trillion would change hands over the following decades. Whatever the exact figure, the great wealth transfer between generations is now underway.

The National Endowment for Financial Education has estimated that up to 70 percent of people who suddenly receive large amounts of money lose that money within a few years. Don’t let this happen to you. Here are some suggestions.

Step 1: Understand Exactly What You’ve Inherited

You probably won’t just receive a check from the estate. More likely you will receive bits and pieces of different investments. The good news is that you usually get a “stepped-up basis,” meaning the cost basis of the assets you receive is determined as of the date of death, which can substantially reduce future capital gains tax.

You also won’t necessarily get all the assets at the same time. Getting different bits and pieces of your inheritance at different times is confusing, and it makes figuring out what you have all the more difficult. You need to know how much your inheritance is, how it is invested, and what the cost basis is to make good decisions going forward.

Understand the Tax Rules

You also need to know where the money is coming from. If you inherited an Individual Retirement Account, for example, there are major tax implications depending on how you decide to withdraw funds from the account – and the SECURE Act’s ten-year payout rule changed the landscape significantly for non-spouse beneficiaries inheriting in 2020 and after. Understanding these rules before taking withdrawals can help you avoid unnecessary taxes and penalties.

Step 2: Prioritize Your Financial Goals

Assign dollar amounts to each goal and then compare your inheritance with how much you will need to meet your goals. This can be a real wake-up call, because when you receive a chunk of money, it is very tempting to spend it on short-term goals such as remodeling the kitchen, buying a car, or that trip to Europe.

Most of us, however, have difficulty meeting long-term goals such as retirement and education for our children. The inheritance may be the only way you can achieve them.

Step 3: Budget for Enjoyment

Now that you know how much you will need for your long-term goals, you can set aside money for that luxury cruise or new car. Set up a separate bank account for this money, and when it is gone, it is gone. Resist any temptation to dip into the rest of the money.

Step 4: Build an Investment Strategy

Make sure the investments you choose match your time horizon and risk tolerance. As you develop the strategy, keep in mind that the tax consequences of inherited retirement plan money are different from non-retirement money – particularly under the SECURE Act and SECURE 2.0 rules now governing inherited IRAs.

Give Yourself Time to Make Major Decisions

Losing someone close to you is difficult enough. Treat the inheritance with the stewardship that will not add feelings of guilt. When you receive their money you may feel rich, but take the time to plan for a secure future before deciding how much you can afford to splurge.

Turn an Inheritance Into a Lasting Legacy

An inheritance represents more than money. It reflects someone’s lifetime of hard work, sacrifice, and desire to provide for future generations. Managing those assets wisely honors that legacy while creating opportunities for your own future.

At DJ Tax Solutions, we help individuals and families understand the tax implications of inheritances, evaluate financial options, and develop long-term strategies that align with their goals.

If you’ve recently received or expect to receive an inheritance, contact DJ Tax Solutions to schedule an introductory consultation and build a plan that helps you make the most of your legacy.