Personal Finance Case Study: Inheritance Windfall
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I recently met with a client who had received an inheritance from a deceased family member. Some details have been changed to preserve anonymity.
“Megan” arrived with a stack of documents an inch thick. She opened her notebook where she had scribbled pages of ideas for using the money. She began talking, and her thoughts were all over the place. Lots of ideas, unsure where to start.
When she finally looked up, dazed and almost frantic, I suggested we pause for a moment to acknowledge all the emotions that can arise upon receiving an inheritance. Grief. Regret. Sadness. Relief. Hopefulness.
Tears sprang to her eyes.
She sat back, took a breath, and said, “It’s hard to process everything with all the emotions swirling around.”
After talking for a few moments to share how she was feeling, it became clear that she felt an obligation and responsibility to use the funds in the best possible way to enhance her life. She wanted to honor the hard work and dedication represented by the inheritance.
With that, we started to plan.
Why Inheritance Decisions Feel So Hard
With an inheritance, it can be incredibly difficult to know what to do first, especially if you are grieving.
You’ve probably heard the saying “don’t make decisions while emotional.” But when it comes to money, that’s almost impossible. We always have emotions around money. And that is expected. It’s perfectly fine and completely normal.
Holistic financial planning includes acknowledging the behavioral and emotional side of your relationship with money. It starts with assessing your values and your goals. Only then do we build an action plan.
Understand What’s Being Inherited
We had to understand the lay of the land. The next step with Megan was getting a clear understanding of the total inheritance.
I sorted through the stack of documents to find recent account statements, and we began to assemble the details. Whether the accounts had already been transferred into her name. The amount and types of accounts she would inherit. The tax status of each account.
Inherited retirement accounts come with very specific rules, and if those rules are not followed, the IRS can assess significant penalties. For example, in almost every case, inherited retirement accounts must be fully withdrawn within 10 years of the inheritance. How much to withdraw each year? There are often rules around that as well.
Beyond inherited retirement account withdrawal rules, different types of inheritance have different tax implications, which can have a big impact on your overall financial plan. In Megan’s case, she was a few years away from retirement herself, so she might decide to hold off on making any large withdrawals until she’s in a lower tax bracket post-retirement.
Even after-tax accounts, such as trusts or brokerage accounts, have tax and financial implications. Knowing the differences and understanding your options is critical.
If real estate is part of the inheritance, there are some beneficial tax rules around this type of property related to a step up in basis. So, if you sell inherited real estate, often there are no/very little taxes owed.
Stepping Back to Look at the Big Picture
Once we understood the details around what Megan would be inheriting, we stepped back and looked at her bigger picture.
From the many ideas she shared at the start of our conversation, a few clear priorities emerged:
Build an emergency and protection fund. Like many of us, Megan’s income was impacted by Covid a few years ago. She still remembers the stress of worrying how she would cover her mortgage during that time.
Prepare to buy a single-family home. Megan currently lives in a multi-family building and dreams of having a yard where she can grow cucumbers and a cozy home that no longer shares walls with neighbors.
Shore up retirement savings. Megan has owned a successful small business for many years and is looking forward to being work-optional in the next five to ten years. While she’s still working, there is an opportunity to allocate some income towards retirement savings.
Travel. Megan spent years caring for family members and was unable to visit friends out of town or travel internationally. She would love to visit some bucket list destinations.
Turning Goals into Something You Can See
Sometimes it helps to make things visual.
We drew boxes on a blank sheet of paper to represent each goal and labeled them Emergency Fund, Single Family Home, Retirement, and Travel.
Then we started assigning rough dollar amounts to each box:
Megan already had some emergency savings but wanted to add a bit more. We wrote that number into the emergency fund box.
Retirement was not the most exciting category, but Megan knew it mattered. She decided to allocate about half of her inheritance toward retirement and future needs.
Buying a single-family home was her next priority. We talked through where she might buy and what the home might cost. Based on that, we calculated a 20 percent down payment. I pulled up an amortization schedule so we could see what monthly payments might look like, including taxes. We adjusted assumptions so she could put more than 20 percent down and feel more comfortable with the monthly payment.
Finally, we talked about travel. I asked questions to help her think it through. Was she imagining a weekend in New York or a three-week tour of Europe? How often did she want to travel? How much might each trip cost? She wasn’t sure yet, so we made some educated guesses just to get started.
A Plan that Felt Hopeful
By the end of our conversation, Megan had a basic outline for using her inheritance in a way that felt meaningful and aligned with her life.
She left feeling hopeful, grateful, and more than a little excited about the future opening up to her.
The Work That Comes After
There are many additional steps in the inheritance process that Megan and I will continue to work through together. Reading the stacks of paperwork. Opening new accounts. Coordinating with estate attorneys and insurance agents. Electronically signing documents. Making calls and following up so assets are properly moved into her name.
It can be a frustrating process.
But having someone by your side to simplify the complicated details can make it easier. And starting with space for emotions and clarity around goals can help maintain motivation through this chapter and into the hopeful future ahead.
If you’ve received an inheritance or other significant windfalls and aren’t sure what to do next, you don’t have to figure it out alone. If you’re looking for thoughtful guidance and a plan that reflects your values, I invite you to reach out and see if we’re a good fit.
