How to Overcome Inheritance Paralysis

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 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 their children 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.

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 to purchase any big-ticket items or make substantial monetary commitments, such as paying down a mortgage, buying a house, maxing out kids’ college funds, or making major investments. If possible, consider leaving any inherited investment positions as they are (within reason, and please consult 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 take your net worth snapshot in the 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 receive an 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 app to create your budget, so you know where and how much of the inheritance you should spend.

Insurance

Consider insuring any substantial collectibles, such as art or jewelry, if you've inherited 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.

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

We're talking high-interest credit card or personal debt. And pay off your credit cards each month, no excuses!

Cash Reserve

Build an emergency cash reserve. You never know when you'll need to pull cash from your rainy day fund.

Tackle student debt

If you have student debt, make a plan to pay it off.

Beef up your retirement plan

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.

Focus on college next

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.

Pay down your mortgage

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 is an 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.

Review your life insurance

Consider changing the amount of 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.

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 (mutual funds, individual stocks, or bonds/bond funds), whether you're comfortable with the holdings, and whether the overall asset allocation mix is appropriate for you.

Determine your asset allocation and risk. Many times we see inherited portfolios with a more conservative allocation (more weighting to conservative fixed income or bonds than to riskier stock or equity positions) than would be appropriate for a younger inheriting heir. However, we strongly caution that 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 many free tools available to help you determine an appropriate asset allocation mix based on your comfort level, 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 assist with this transaction.

Income Tax

If you have inherited a substantial amount, 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 fully understand this.

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, and 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 and 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 markets move and as you near retirement.

It is important to understand that nothing in this content should be considered personalized investment, financial, tax, or legal advice.