I’ve inherited a lump sum, what now? 

I’ve inherited a lump sum, what now? 

4 mins readLast updated March 9, 2023by Kate Morgan

A sizeable inheritance can set you up for the future — but only if you treat it carefully. ​​A third of inherited lump sums are spent within two years and have no significant impact on the recipient’s long-term wealth. Keep reading if you’d like to make the most of yours, and peruse our guide to handling a significant inheritance properly.

The modern landscape of inherited assets

​​​In the next two decades, younger US generations will inherit over $70 trillion in assets and cash from their older relatives. Many experts are calling it “The Great Wealth Transfer.”  

With property prices having risen astronomically over the last 50 years and more people than ever aware of the benefits of investing, older people are consolidating their wealth. 

​​The average American now stands to inherit around $46,200, a figure which only looks set to rise. But if you were to receive such a lump sum, what should you do with it? 

What is considered a large inheritance?

The first thing you need to be aware of when figuring out how to use your inherited lump sum effectively is where your inheritance falls on the scale. Is it of a standard, average amount, or is it particularly sizeable? The ​​financial advice you receive for one might not be the same as it would be for the other. So, what is a large inheritance?  

The term is subjective, but we’d say anything over $100,000 falls into this category — and we’d advise seeking expert support on any inheritance amount above the five-figure mark. Even $10k can make a significant difference to your future if handled wisely, and investing in professional advice and guidance gives you the best shot at maximizing the impact of your gift in a way that aligns with your long-term financial goals.  

How do you receive inheritance money?

When someone dies, it’s the executor of the will’s job to let you know if you’re receiving an inheritance. If you are, how you’ll receive this money will depend on where and how it’s contained. If held in savings, the funds can be transferred to you or given as a check. In the case of assets such as property or other tangible items, they’ll need to be sold before the money can be released.  

One important thing to remember is that before any money is distributed, remaining debts must be paid from the value of the estate. Some people choose to take out a ​final expense life insurance policy to settle debts like medical care and funeral expenses after they pass away, and some don’t.  

Expect your inheritance to be impacted if these debts aren’t covered. And be aware that if your family member or beloved friend had unexpected medical expenses at the end of their life, their estate could be wiped out. Never start spending an inheritance before the dollars are in your account.

How to deposit a large cash inheritance

To keep your inherited lump sum safe until you’re sure what you’d like to do with it, make sure you deposit it in a federally insured bank or credit union account. ​This will allow you to protect up to $250,000 per person if the bank goes bust. Your bank may ask for proof that the funds have come from an inheritance as part of anti-money-laundering regulations, so make sure you have this to hand.

What to do with an inheritance once you receive it

Once you get your inheritance, it’s sensible to speak to professionals as soon as possible. As a priority, you must understand whether you’ll be hit with an inheritance tax bill. Your tax liabilities will depend on the state you live in, but could include: 

  • Inheritance tax (the threshold and percentage will vary across states) 

  • Federal estate taxes (currently applied to inheritance amounts over $12.06 million but could change with each new president) 

  • IRA inheritances 

  • Taxable investment accounts 

  • Life insurance benefits (most are tax-free, but you should check the terms of the deceased’s policy to be sure) 

There are also some special rules around inherited ​​Individual Retirement Accounts (IRAs), both traditional and Roth, so make sure you seek guidance before spending. Once you’ve satisfied the Internal Revenue Service (IRS) and the State Department of Taxation, the time will come to explore your options for the windfall that remains. 

An accountant, financial planner or independent investment advisor will lay out your options and help you decide which route is right for you. Here are just a few options they could help you consider: 

  • Paying off your debts - If you have high-interest debts, it’s wise to prioritize paying them off. Student loans and credit cards can command a significant chunk of each month’s paycheck. Even if you can’t get rid of them entirely, your inheritance could help you consolidate a smaller chunk of debt and access better interest rates 

  • Ringfencing an emergency fund - Before you place the entirety of your inheritance in an IRA or tie the money up in investments that prevent it from being immediately accessible, save a portion for your emergency fund. It’s wise to have around three to six months’ worth of expenses on hand in case of sudden financial shocks like redundancy 

  • Earmarking savings for retirement - This is especially important if you’ve yet to begin saving for your later years, as the sooner you can start, the better. An IRA is the simplest option, but don’t be afraid to explore investments to help your retirement savings keep pace with inflation 

  • Explore your investment options – If your debts are covered, you have an emergency fund in place, and your retirement savings are on track then you might want to consider long-term investing. Typical investments include stocks, real estate and commodities such as gold. 

Whatever the size of your inheritance, Unbiased can help you figure out the best way forward. Contact a financial advisor at Unbiased today.  

Content writer

Kate Morgan

Kate has written for leading publications and blue chip companies over the last 20 years.