Receiving an inheritance can stir up a mix of emotions. Along with grief and sadness, many people feel overwhelmed when faced with the responsibility of managing their new financial situation. With some thoughtful planning and guidance, however, the process can become both easier and more meaningful.
This gift is ultimately a gesture of love from someone who wanted the best for your future. By using it wisely, you can help honor their legacy. Let’s look at some of the most common types of inherited assets and review options for managing them.
Estates vs. Trusts
Estates and trusts are the two most common types of assets that people can leave to their loved ones. While an estate refers to everything a person owns independently at the end of their life — such as funds in banking and investment accounts, a home, car, jewelry and other property — a trust is a legal entity that can transfer assets over time. An estate is passed on via a will or, failing that, sometimes to the closest next of kin — and transfers assets all at once. A trust must be established by the grantor ahead of time, and it can include conditions for disbursal. For example, a trust may specify that inheritors can only use funds for education. In this way, trusts provide a more controlled and structured way to transfer assets and have additional tax benefits. Trusts can even begin disbursing assets before the grantor passes away.
Navigating Taxes and Procedures
To receive an inheritance, probate is often required. This process divides and distributes assets, typically according to a will, and settles any outstanding debts. Once probate is completed, you’ll need to understand the tax implications of your inheritance.
Currently, the U.S. federal estate tax only applies to individuals with estates valued over $13.61 million, but this threshold is set to expire and revert to $7 million per individual at the beginning of 2026. Assets above this amount can be taxed at up to 40%. In addition, 12 states and the District of Columbia impose a separate state estate tax charged against the estate, and six states currently levy an inheritance tax to be paid by the beneficiary. To help reduce the tax burden on their heirs, many high-net-worth individuals choose to set up trusts or make annual gifts in advance.
Managing Gift Income
An inheritance is a lasting reminder of your loved one, so thoughtfully managing what is passed down to you can honor that intent. Seeking advice from a Financial Professional can be especially helpful during this time. An inheritance can help you pay down debt, build savings or invest for the future and your retirement. It can also give you an opportunity to do something special, such as traveling, spending more time with family or making a charitable donation in your loved one’s name to create a legacy. These actions not only reflect your shared values but can also help you derive something positive and lasting from what can be a difficult loss.
Ultimately, managing an inheritance is about honoring your friend or family member’s gift by making thoughtful choices for your financial well-being. With careful planning, you can ensure their financial legacy helps provide more stability and purpose to your life — and serves as an enduring reflection of generosity and love.