What to do with inheritance funds

Losing a loved one may be one of the most challenging experiences in life. It's already a time of stress and grief. Add in the need to make important financial decisions, such as what to do with inheritance assets, and it can feel like you have far too many tasks on your plate.

If your loved one left you a gift, you might not know what to do with the money or assets you've received. Should you invest? Pay down debt or student loans? Buy something you've always wanted? Although it can be difficult to separate these decisions from the emotions that come with the grieving process, making sudden decisions—especially concerning finances—may backfire later. Take time to step back and consider your options.

An inheritance is the sum of any assets someone leaves another person after passing away. These assets may include cash, property, stocks and bonds, furniture, jewelry, collectibles, cars and other tangible assets. A person's will details any assets paired with chosen beneficiaries, which can be their spouse, children, grandchildren, siblings, friends or an organization or charity you care about.

Whether you inherit $5,000 or $5,000,000, you should try to honor your loved one's gift by using it wisely. Consider putting any money you receive immediately into a low-risk liquid account, such as a high-yield savings account, money market account or certificate of deposit. This move can help keep your funds safe and accessible while you review long-term options.

A critical step in developing a plan for what to do with inheritance funds is to assemble a financial team. Financial professionals can act as a source of information and guidance, while they help you avoid potentially rash decisions. Your team may feature some of the following members:

• A tax lawyer or accountant helps you review any tax consequences of your inheritance and develop tax-efficient strategies.
• An estate management professional offers guidance around estate strategies if you want to prepare for your own financial legacy.
• A financial advisor works with you to build a new strategy, define clear goals and explore investments and insurance needs. They can help you determine how much coverage you may need if you want to reevaluate your current life insurance, insure new assets or get coverage for the first time.
• A real estate professional helps you get an inherited home ready for sale if you'd like to sell the property.

Each of these professionals can help you get your financial house in order, as they can offer insight into how to make your new assets align with your goals and needs. They also can help you establish long-term financial goals, if needed.

While financial professionals certainly will recommend ideal long-term financial goals, it's important that you consider your own priorities and values before making any moves. Windfalls of cash—such as inheritances, tax refunds or bonuses at work—offer an opportunity to evaluate your financial picture and push the money toward any areas that need strengthening.

Ask yourself some of the following questions:

• Do I have any significant debt I should pay down?
• Do I want to pay for/contribute to my children's education?
• Do I need to boost my current retirement savings?
• Do I want to pay down my mortgage or buy a home?
• Do I want to give back to my favorite charity?

Thinking about these questions can help give you an idea of what matters most to you. After all, receiving a significant inheritance can help you invest in your family's future, and reduce the financial stress in your life. It's not something you want to take lightly.

As time goes by, you may have a clearer idea of what to do with your inheritance. Keep an open mind as you learn about your choices for investing or using your inheritance—with so many options, trying to determine the right choice can overwhelm even seasoned investors.

Start with a simple question: What do you think your loved one would want you to do with some (or all) of the money?

This is where your financial team can work side by side with you, providing support, insight and guidance. Here are some of the options available to people with inheritances.

• Fund a high-yield savings account, money market or certificate of deposit. One of these accounts can help you build up emergency savings and bring some stability to your finances. You also can leave funds in these accounts while setting up a future plan with your investment team.

• Pay down debt. Most people have some form of debt—whether student loans, credit card bills or a mortgage—that funds from an inheritance could reduce.

• Buy a home. If buying a home has seemed out of reach, the cash from your inheritance may help you facilitate the purchase.

• Build college savings. College can be expensive. Your inheritance may help you fund tuition for your kids right away, or you might begin exploring college savings options.

• Invest in retirement. If you've been concerned about saving for retirement, consider investing your inheritance in an individual retirement account. If you're over 50, you also may want to use the funds for catch-up contributions.

• Plan your estate. One reason you received your inheritance is that your loved one created a legacy plan to leave you something after they passed. You may want to follow their lead and make your own.

• Give it to individuals. If you want to give some gifts to your family members, you can. Just be sure to discuss your plans with your accountant or tax lawyer to stay within Internal Revenue Service gifting regulations.

• Donate to charity or a nonprofit. You may have a handful of organizations or groups that hold a special place in your heart. Giving some of your inheritance to these charities can help you use your money for good. You may even consider donating in your loved one's name if they cared for these organizations as well.

• Splurge responsibly. Consult your financial team and determine an amount you can spend without guilt. Even if it's a small number, you can do something special to honor your loved one and their gift and enjoy yourself.

Your inheritance may not come in the form of cash but valuable assets such as real estate, jewelry or collectibles. How can you invest inheritance funds that aren't liquid and can't directly pay down debt or go immediately into the market?

In cases like these, consider bringing your questions to your financial team for their thoughts. Here are some general suggestions for:

• A home. You have a few options here. You can decide to rent or sell the home and put the profit toward your financial goals or to move into the home and sell your current home.

• Jewelry or collectibles. Selling is an option, but some of the items may carry special meaning to you. If so, look into getting the items valued and insured.

• Furniture or cars. As with real estate and other collectible items, you may want to get cars or special pieces of furniture valued so you can sell them. You also can give the items to family, friends or local charities.

Although it's not as easy to spend these assets quickly, wait before making any decisions on what to do with them. Taking the time and space you need can give you clarity around complex situations.

Remember that you don't have to face these decisions alone. Working with a financial advisor can help you sort through the decision-making process and explore the options to help you achieve your long-term financial goals.

With the right expertise in your corner, you can work to develop a plan for your inheritance and gain more confidence in your finances.