What should I do with inheritance money? How can I avoid mistakes when receiving an inheritance? What is inheritance financial planning?
Receiving an inheritance can be both a blessing and a challenge. It provides financial opportunities, but also requires careful planning to avoid costly mistakes that could erode your wealth or create unnecessary tax burdens.
Unfortunately, many people struggle with what to do when inheriting money. Without a clear plan, inherited wealth can disappear quickly through rushed decisions, misunderstood tax rules, lifestyle inflation, and lack of professional guidance. The good news? Most inheritance mistakes are entirely preventable with the right guidance and strategy.
In this article, CERTIFIED FINANCIAL PLANNER® certificant Kerry Connell examines the five most common mistakes people make when inheriting money and what to do instead to protect and grow your inherited wealth.
Table of Contents
Mistake #1: Rushing Into Financial Decisions
Mistake #2: Not Understanding Tax Implications
Mistake #3: Not Saving & Investing Inherited Money
Mistake #4: Falling Victim to Lifestyle Creep
Mistake #5: Going It Alone
How HTG Can Help
Mistake #1: Rushing Into Financial Decisions
The Problem
One of the biggest mistakes when inheriting money is making hasty financial decisions during an emotionally vulnerable time. Many beneficiaries feel pressured to “do something” immediately with their inheritance, whether that’s buying a new home, investing in a business opportunity, or making large purchases.
This urgency often leads to poor choices that can’t be easily reversed. The emotional weight of losing a loved one, combined with suddenly having significant assets, creates a perfect storm for impulsive decision-making.
What to Do Instead: Take Time to Reflect
When you inherit money, the best initial strategy is patience. Here’s how to invest inheritance wisely by first taking a thoughtful pause:
Give yourself a grace period of at least 3-6 months. During this time, keep inherited funds in a safe, liquid account such as a high-yield savings account or money market fund. This provides time to process your emotions and carefully consider your options.
Avoid major lifestyle changes immediately. Resist the temptation to quit your job, relocate, or make other significant life changes until you’ve developed a comprehensive plan for your inheritance.
Use this period to educate yourself. Research inheritance investment advice, understand your current financial situation, and identify your short-term and long-term goals. This foundation will help you make more informed decisions when you’re ready to act.
Create a preliminary plan. While you shouldn’t rush into decisions, you should begin outlining your priorities. Ask yourself: Do you have high-interest debt? Is your emergency fund adequate? Are you on track for retirement?
Mistake #2: Not Understanding Tax Implications
The Problem
Many people assume that all inherited assets are tax-free, but the reality is more complex. Different types of inherited assets have vastly different tax treatments, and failing to understand these nuances can result in unexpected tax bills or missed opportunities for tax-efficient strategies.
While you generally won’t pay income tax on receiving inheritance in the form of cash or property, you may face taxes when you sell inherited assets or take distributions from inherited retirement accounts.
What to Do Instead: Understand the Tax Rules
Understanding how to invest inheritance money to save taxes starts with knowing the tax treatment of different asset types:
Tax Treatment by Asset Type*
| Asset Type | Tax Implications | Key Considerations |
| Cash | Generally tax-free when received | No immediate tax impact |
| Stocks/Brokerage Accounts | Step-up in basis to fair market value at death | Capital gains only on appreciation after inheritance |
| Real Estate | Step-up in basis to fair market value at death | May face property taxes; rental income is taxable |
| Traditional IRA | Distributions taxed as ordinary income | Most beneficiaries must withdraw within 10 years |
| Roth IRA | Tax-free distributions if account was open 5+ years | Still subject to 10-year distribution rule |
| Annuities | Taxed on gains above basis | Tax treatment depends on payout option |
| Life Insurance | Generally tax-free | Some exceptions for certain policy types |
*Consult your tax professional regarding your specific financial situation.
Work with a tax professional immediately. Before making any decisions about how to invest an inheritance, consult with a qualified tax advisor who can help you understand:
- Which inherited assets have immediate tax consequences
- How inheritance distributions will affect your current tax bracket
- Strategies for minimizing tax liability over time
- Required minimum distributions (RMDs) for inherited retirement accounts
Develop a tax-smart distribution strategy. For inherited retirement accounts, timing matters significantly. Learn about the new rules for inherited IRA required distributions to avoid penalties and optimize your tax situation.
Consider the impact on your overall tax picture. Strategic tax planning can help you minimize this impact through tactics like spreading distributions across multiple years, coordinating withdrawals with lower-income years, and using charitable contributions to offset taxable income.
Mistake #3: Not Saving & Investing Inherited Money
The Problem
Without a clear plan, inherited money can disappear surprisingly quickly. Many beneficiaries spend their inheritance on immediate wants rather than investing for long-term needs. Others keep inherited funds in low-interest accounts, where inflation slowly erodes their purchasing power.
This represents a lost opportunity to build lasting wealth and financial security. An inheritance could fund your retirement, create generational wealth for your children, or provide financial independence—but only if it’s properly invested and protected.
What to Do Instead: Build a Strategic Savings and Investment Plan
Knowing how to invest inheritance for retirement and other long-term goals requires a systematic approach that balances safety, growth, and your personal financial objectives.
Step 1: Strengthen Your Financial Foundation
Before investing, ensure your basic financial security is solid:
Build a robust emergency fund. Use part of your inheritance to establish or bolster a rainy-day fund covering 6-12 months of living expenses in a high-yield savings account.
Eliminate high-interest debt. Pay off credit card balances, personal loans, and other high-interest debts. The guaranteed “return” from eliminating 18-20% credit card interest typically exceeds what you’d earn through most investments.
Fund tax-advantaged accounts. If you’re not already maximizing retirement contributions, use inheritance funds to:
- Max out your 401(k) or 403(b) employer retirement plan
- Contribute the maximum to a traditional or Roth IRA
- Open and fund a Health Savings Account (HSA) if you have a high-deductible health plan
- Contribute to a 529 college savings plan for children’s education
Step 2: Develop an Investment Strategy
Once your foundation is secure, focus on how to invest a large inheritance for growth:
Align investments with your goals and timeline. Your investment strategy should reflect when you’ll need the money:
- Short-term goals (0-3 years): High-yield savings, CDs, or short-term bonds
- Medium-term goals (3-10 years): Balanced portfolio of stocks and bonds
- Long-term goals (10+ years): Growth-oriented stock portfolio
Diversify across asset classes. Don’t put all inherited money into a single investment. A well-diversified portfolio typically includes a range of asset classes, market capitalizations and industries.
Consider your risk tolerance. How to invest your inheritance depends on your comfort with market volatility. Professional investment management can help you find the right balance.
Implement dollar-cost averaging for large sums. Rather than investing a large inheritance all at once, consider spreading investments over 6-12 months. This reduces the risk of buying at a market peak and provides psychological comfort.
Mistake #4: Falling Victim to Lifestyle Creep
The Problem
Lifestyle creep—also called lifestyle inflation—occurs when spending increases to match new wealth. After receiving an inheritance, many people unconsciously upgrade their lifestyle: nicer cars, bigger homes, expensive vacations, and luxury purchases become the new normal.
While treating yourself isn’t inherently wrong, unchecked lifestyle creep can consume your entire inheritance within a few years. This is especially dangerous when new spending involves recurring costs like larger mortgage payments, car loans, or membership fees.
What to Do Instead: Practice Intentional Spending
The key to avoiding lifestyle creep is developing a conscious, values-based approach to how you use inherited money:
Establish a “splurge limit.” It’s reasonable to enjoy some of your inheritance, but set clear boundaries. Many financial advisors suggest allocating 5-10% for discretionary spending, while preserving the remainder for long-term financial goals.
Beware of increasing fixed expenses. The most dangerous form of lifestyle creep involves new recurring costs. These ongoing commitments can drain your inheritance and leave you financially stretched if circumstances change.
Focus on financial security first. Before upgrading your lifestyle, ensure you’ve eliminated high-interest debt, built adequate emergency reserves, funded retirement accounts, and secured appropriate insurance coverage.
Use the “48-hour rule” for major purchases. When tempted to make a significant purchase with inherited funds, wait at least 48 hours before buying. This helps distinguish between impulsive wants and thoughtful choices aligned with your values.
Identify what truly matters. Rather than automatically upgrading everything, get clear on what would genuinely improve your quality of life. Would you rather have a fancier car or the security of knowing your children’s education is funded?
Learn more about protecting yourself from the silent threat to your wealth: lifestyle creep.
Mistake #5: Going It Alone
The Problem
Perhaps the most costly mistake when inheriting money is trying to manage everything yourself without professional guidance. While self-reliance is admirable, inheritance planning involves complex considerations spanning tax law, investment strategy, estate planning, and behavioral finance.
Every inheritance situation is unique, and a strategy that works for someone else may be entirely wrong for your circumstances. Additionally, the emotional context of receiving an inheritance—often during grief—makes objective decision-making particularly challenging.
What to Do Instead: Build Your Professional Advisory Team
Successful inheritance financial planning typically requires expertise from multiple professionals:
Financial Advisor/Planner. A qualified financial advisor serves as the quarterback of your inheritance strategy, helping you develop a comprehensive financial plan, create an appropriate investment strategy, coordinate with other professionals, and provide objective guidance during emotional decision points.
When choosing a financial advisor for inheritance planning, look for fiduciary status, relevant credentials (CFP®, CFA), experience with inheritance planning, and a comprehensive, fee-transparent approach.
Tax Professional. A CPA or tax attorney who specializes in inheritance matters can analyze tax implications, develop strategies to minimize tax liability, ensure IRS compliance, and coordinate tax planning with your overall financial strategy.
Estate Planning Attorney. Even after receiving an inheritance, you need to update your own estate plan, including your will, beneficiary designations, and considerations for how your inheritance will eventually pass to your heirs.
How HTG Advisors Can Help
At HTG Advisors, we understand that receiving an inheritance is about more than just money—it’s about honoring a legacy while securing your own financial future. Our comprehensive approach to inheritance financial planning includes:
Personalized Strategy Development. We take time to understand your unique situation, goals, and values before recommending any specific actions.
Coordinated Expertise. Our team brings together professionals with deep experience in tax planning, investment management, and wealth preservation.
Ongoing Support. Inheritance planning isn’t a one-time event. We provide continuous guidance as your circumstances evolve.
Transparent, Fiduciary Service. As a fee-only advisory firm, we’re legally obligated to act in your best interest at all times.