Smart Strategies for Managing and Protecting Your Inheritance

Receiving an inheritance can be a life-changing financial event, but without careful planning, it can also become a missed opportunity. Whether you inherit real estate, investments, retirement accounts, or cash, understanding how to manage these assets is essential. According to Kiplinger’s article, “Manage an Inheritance Like a Pro in Just Seven Steps,” taking the right approach can help you preserve and maximize your inheritance for the long term.

1. Understand What You Have Inherited

Before making any financial moves, take the time to understand the nature of your inheritance. Estate plans can include various types of assets, such as:

• Real estate
• Investment accounts (stocks, bonds, and mutual funds)
• Retirement accounts (IRAs, 401(k)s)
• Cash and bank accounts
• Life insurance proceeds
• Personal property

Each asset type has different rules regarding taxes, ownership transfer, and potential restrictions. Knowing what you have inherited is the first step toward making informed decisions.

2. Be Patient—Settling an Estate Takes Time

Estates are not settled overnight. The executor must identify and gather assets, pay off debts, and follow legal procedures, which can take months or even years. If the deceased did not have a will, probate court proceedings may further delay the process. It’s best to avoid making any major financial decisions until you have a clear picture of what you’ll receive and any associated obligations.

3. Know the Tax Implications

Taxes on inherited assets depend on the type of asset, your relationship to the deceased, and your state’s tax laws. Here’s what to keep in mind:

• Federal estate tax: Most estates are not subject to federal estate taxes unless they exceed the exemption limit.
• State estate and inheritance taxes: Some states impose their own estate or inheritance taxes. The tax rate often depends on the beneficiary’s relationship to the deceased.
• Capital gains tax: Investments such as stocks and real estate typically receive a step-up in basis, meaning their taxable value is adjusted to the market value at the time of the original owner’s death. This can reduce the capital gains tax burden if you sell these assets.

Since tax rules can be complex, consulting an estate planning attorney or tax professional is essential.

4. Manage Investments and Retirement Accounts Wisely

Different rules apply when inheriting investment accounts or retirement funds:

• Taxable investment accounts: If you inherit stocks, bonds, or mutual funds, you may choose to cash out or reinvest. Review your overall financial strategy before making changes.
• Inherited IRAs and 401(k)s: Spouses can roll over inherited retirement accounts into their own IRAs, deferring distributions until they reach age 73. However, non-spouse beneficiaries must typically withdraw the entire account within 10 years, which may result in significant tax liabilities.

If you inherit a home, the property’s value will also receive a step-up in basis, reducing capital gains taxes if you decide to sell. However, selling inherited real estate can involve complex tax considerations, so professional guidance is recommended.

5. Life Insurance Payouts—What You Should Know

Life insurance proceeds are typically not taxable as income, but they may be included in the deceased’s estate for tax purposes. If the policy pays out a lump sum, there’s no tax on the principal amount, but interest earned on the payout may be taxable.

6. Spend Wisely and Plan for the Future

Once you understand your tax obligations, you may consider using your inheritance for financial stability. Many people use an inheritance to:

• Pay off high-interest debt (such as credit cards or student loans)
• Build an emergency fund
• Invest for long-term growth
• Make a down payment on a home

However, it’s easy to underestimate how quickly an inheritance can be depleted. Instead of making impulsive financial decisions, secure your assets in a safe account and consult with a financial advisor to create a sustainable wealth management strategy.

7. Protect Your Inheritance with an Estate Plan

One of the best ways to ensure your inheritance benefits future generations is to put an estate plan in place. If you don’t already have a will or trust, now is the time to create one. If you’ve inherited significant assets, you may also consider setting up a trust to protect your wealth and minimize tax exposure.

Secure Your Inheritance with Expert Guidance

Managing an inheritance involves more than simply receiving assets—it requires careful planning to protect your financial future. At The Werner Law Firm, our experienced estate planning attorneys help individuals navigate inheritance laws, tax implications, and estate planning strategies. Whether you need guidance on asset protection, estate taxes, or long-term financial planning, we are here to assist.

If you have any questions, schedule a free appointment with us through our online appointment page.

You can also read reviews from some of the hundreds of clients we have helped over the years.

Reference: Kiplinger (Jan. 24, 2025) “Manage an Inheritance Like a Pro in Just Seven Steps”