Planning for a Large Inheritance: What You Need to Know

Receiving a large inheritance can be a life-changing financial event. Whether it comes as a result of a loved one's passing or is planned in advance, an inheritance has the potential to provide long-term financial security. But it also comes with complexity. From taxes and investment strategy to emotional readiness and long-term planning, managing a large inheritance effectively requires careful consideration.

For individuals planning for or already in retirement, understanding how to incorporate an inheritance into their broader financial picture is essential. Without proper planning, even significant windfalls can be squandered or mismanaged. In this blog post, we’ll explore the key considerations, benefits, potential pitfalls, and smart strategies for managing a large inheritance—especially with retirement in mind.

Why Inheritance Planning Matters in Retirement

Retirement is a stage in life where your income sources shift. Most people rely on a combination of savings, pensions, Social Security, and possibly investment income. A large inheritance can strengthen your financial position, offering a buffer against longevity risk, unexpected healthcare expenses, or market downturns. However, it can also introduce new challenges like increased tax liability, overexposure to certain assets (such as real estate or concentrated stock), or poor investment decisions.

Inheriting wealth without a plan can lead to unintended financial consequences. That’s why it’s important to think of an inheritance not as a one-time gift, but as part of a larger financial strategy that supports your long-term goals.

Key Considerations When Receiving an Inheritance

1. Understand What You're Inheriting

Inheritances come in many forms:

• Cash or investment accounts

• Retirement accounts (IRAs, 401(k)s)

• Real estate

• Business interests

• Collectibles or other tangible assets

  
  

Each of these carries unique tax implications, legal considerations, and levels of liquidity. For example, inheriting a traditional IRA might mean you’re subject to required minimum distributions (RMDs) and ordinary income tax, while inherited brokerage accounts may benefit from a step-up in basis, reducing capital gains taxes.

2. Tax Implications

While there is no federal inheritance tax, estate taxes can apply depending on the size of the estate and the state in which the deceased or the beneficiary resides. Key tax issues to consider include:

• Step-up in basis: Assets like stocks or real estate receive a new cost basis at the date of death, potentially minimizing capital gains if sold.

• Income tax: Distributions from inherited retirement accounts are generally taxed as ordinary income.

• State inheritance or estate taxes: Some states levy taxes on beneficiaries, even when the federal estate tax doesn’t apply.

  
  

Understanding these rules is critical before making decisions about liquidating or transferring inherited assets.

3. Emotional and Psychological Factors

Grief can cloud judgment. It's not uncommon for heirs to make quick financial decisions in the aftermath of a loved one’s death. Taking time to process emotionally before making major money moves is not just healthy—it’s smart.

Strategies for Managing a Large Inheritance

1. Don’t Rush

When you receive an inheritance, your first move should be no move at all. Give yourself time to evaluate the situation. Park the funds in a high-yield savings account or money market fund while you consult with professionals and gather information.

2. Revisit Your Financial Plan

Use this opportunity to reassess your retirement strategy, investment allocation, estate plan, and insurance coverage. Questions to ask:

• Does this inheritance allow me to retire earlier?

• Can I reduce investment risk or increase charitable giving?

• Should I use this money to pay off debt or boost emergency savings?

  
  

A large inheritance may fundamentally shift your risk profile and future goals.

3. Prioritize Tax Efficiency

Tax planning is crucial. For example:

• Use inherited cash to fund a Roth IRA conversion, spreading the tax burden across low-income years.

• Consider Qualified Charitable Distributions (QCDs) if you’re inheriting an IRA and are subject to RMDs.

• Use tax-loss harvesting in taxable accounts to offset gains from inherited assets.

  
  

A financial advisor can help build a personalized strategy that minimizes tax exposure while maximizing long-term growth.

4. Diversify Wisely

Many people inherit concentrated positions in company stock or real estate. While sentimentality or loyalty may tempt you to hold these assets, diversification is often a safer path. Evaluate whether keeping certain assets aligns with your long-term financial goals.

Short-Term vs. Long-Term Financial Impact

Short-Term: In the immediate aftermath, you may have increased liquidity, but also higher stress around decision-making. You’ll likely need to address probate, transfer of assets, and potential tax forms.

Long-Term: Handled well, a large inheritance can improve retirement readiness, fund travel or gifting goals, or help preserve a legacy for the next generation. Conversely, without strategic planning, it could lead to overspending, tax inefficiency, or even financial dependence on temporary wealth.

The Role of a Financial Advisor

Navigating the financial, tax, legal, and emotional complexities of an inheritance requires more than a DIY approach. Working with a knowledgeable financial advisor ensures your decisions align with your broader life goals, retirement plans, and values.

An experienced advisor can:

• Help you understand what you've inherited

• Identify potential tax consequences

• Coordinate with attorneys and CPAs

• Integrate your new assets into your investment strategy

• Help you build or revise your estate plan

• Guide charitable giving or legacy planning

  
  

If you're anticipating or have recently received a large inheritance, schedule a complimentary phone call to speak with a financial advisor today:👉 https://www.openairadvisers.com/requestameeting

Actionable Takeaways

1. Pause before acting – Give yourself time to grieve and plan.

2. Identify all assets – Know exactly what types of assets you’re inheriting.

3. Assess tax implications – Step-up in basis, RMDs, and estate taxes may apply.

4. Revisit your financial plan – Integrate the inheritance into your retirement goals.

5. Avoid emotional decisions – Don’t let guilt or grief drive financial behavior.

6. Diversify if necessary – Avoid overexposure to one asset class or security.

7. Work with a trusted advisor – A professional can help you plan strategically and holistically.

   
   

Final Thoughts

Receiving an inheritance is often bittersweet—it reflects the passing of someone meaningful while presenting new financial opportunities and challenges. With clear thinking, patience, and the right professional guidance, you can turn this transition into a powerful step toward long-term financial well-being.

If you’d like help navigating the next steps or want to understand how an inheritance might impact your retirement plan, don’t hesitate to connect with us.📞 Schedule your complimentary call here: https://www.openairadvisers.com/requestameeting

Your future is too important to leave to chance—let’s plan wisely.