Inheriting a Legacy: What to Do With an Inheritance

Inheriting a Legacy: What To Do With An Inheritance

By Andrew Khosrofian, CFP, CAIA

Assistant Vice President, Portfolio Manager & Analyst

Over the next few decades, multigenerational wealth transfer will be on the rise. According to Forbes, roughly $84 trillion in assets will be part of this transfer by 2045. If you happen to be one who benefits from this transfer, receiving an inheritance can come with many questions and emotions. Depending on your unique circumstances and the amount, you may consider it a convenient windfall or an opportunity to supplement income or make an investment.

Your stage in life may factor into your decision-making process. If you are a Millennial or part of Gen Z, you might want to use an inheritance toward a down payment on a home and to build equity. Or, if you are closer to retirement, an inheritance may help finance your dream vacation home or be invested for retirement.

Regardless of age, below are some considerations on what to do with an inheritance:

Pay off high-interest debt

Consider first paying off high-interest, non-mortgage debt that can cripple your credit score and ability to save, such as credit cards and student loans. Reducing or eliminating debt can help you build back credit and provide peace of mind.

Put a down payment on a home

For many, owning your own home—whether it be your first home, your dream home or your vacation home—comes to mind. In recent years, median existing home prices have risen, so your money may not go as far. In 2019, the average price was $274,500—that number is now $426,900 as of June 30, 2024, a 55.5% increase. As a result, the difference between a 20% down payment equates to $54,900 and $85,200, respectively. Our team of can help you find the best solution for you. If you wish to use an inheritance to purchase a new primary residence or finance a vacation home or second property.

Build up a Safety Savings

An estimated 66% of Americans feel they are living paycheck-to-paycheck. Depending on the size of your inheritance, this may be a good opportunity to build an emergency savings. The general guideline is to have funds sufficient to cover three to six months of basic expenses. At The National Bank of Indianapolis, we can provide Personal Banking services that can assist you with savings.

Increase/Maximize your Retirement Contributions

Receiving an inheritance may provide you with sufficient liquidity to save for retirement with better tax efficiency. Check with your tax advisor whether it is proper for you to make pre-tax contributions that lower your current taxable income, Roth contributions to have potentially tax-free withdrawals in the future or a combination of the two, if eligible. Our Wealth Management team can provide custom solutions based on your specific goals.

Maximize your Health Savings Account (HSA) contributions

If your employer offers an HSA plan, you may be eligible to annually contribute $4,150 individually or $8,300 on a family plan (individuals 55 years old and older can contribute an additional $1,000) to an HSA that allows pre-tax assets to grow tax-deferred and distributed tax-free for qualified medical expenses. Plan participants are allowed to keep their HSA contributions if they change employers. This is an effective way to save for medical costs in retirement.

Contribute to a College 529 Savings Account

It is never too early to start saving for education. Earnings in a 529 Plan grow tax-deferred and are free from federal income tax when used for qualified education expenses. Indiana taxpayers are eligible for a state income tax credit of 20% for eligible contributions to an Indiana529 Direct account.

Fund an After-tax Investment Account

Investing your inheritance can be a wonderful way to build long-term wealth. Further, some inheritances may be in the form of an in-kind transfer of investment securities. A significant benefit of inheriting marketable securities is that the holdings receive a tax basis step-up to the date of death of the bequeathed. This allows for earlier unrealized gains to be reset. Should you inherit an investment portfolio, this is an opportune time to meet with a financial professional to evaluate the current holdings and discuss your long-term investment goals. Our experts at Market Street Fund Management or Diamond Capital Management can help.

Gifting

Receiving an inheritance may be a good occasion for you to start planning the most tax-efficient manner for your heirs to receive their inheritance. Currently, individuals can gift up to $18,000 a year, $36,000 for married couples, to another individual under the federal gift tax exclusion. And there is no limit on the number of eligible individuals to whom you can gift. It is always important, however, to check with your tax advisor about possible state and lifetime gift taxing considerations.

Prudently make a Splurge Purchase

A luxury material good or a family trip for which you have always longed can be good, provided you have already paid off your high-interest debt, immediate living expenses, retirement contributions and emergency savings, and you are not spending beyond your means. One may also consider the intentions of the person who left the inheritance, and whether he/she would have wanted you to do something enjoyable.

Choosing what to do with an inheritance can be an extremely personal decision. It is important that you take time and think through your options, always prioritizing your financial goals. Speaking to a certified financial planner, or one of our other Wealth Management experts at The National Bank of Indianapolis, can help.