What Should You Do With an Inheritance? How to Invest Inherited Money Without Letting Emotion Drive the Decision
Receiving an inheritance can create an unusual financial situation.
You may suddenly have more money than you've ever managed before.
But unlike a bonus, business sale, or other financial windfall, inherited money often comes with something else:
Emotion.
Maybe the brokerage account belonged to your parents.
Maybe the stock was something your grandfather owned for decades.
Maybe you inherited the family home.
Or maybe the money represents a lifetime of work and sacrifice from someone you loved.
That can make seemingly straightforward financial decisions much harder.
Should you sell the investments?
Should you leave the account exactly as it is?
Should you pay off your mortgage?
Invest the money?
Use some of it?
Give some away?
We've found that one of the most important distinctions when planning around an inheritance is this:
Being a good steward of inherited money doesn't necessarily mean keeping it exactly as you received it.
The person who left you the money had their own financial life.
Now the inheritance needs to fit into yours.
1. Don't Feel Like You Need to Do Something Immediately
An inheritance can arrive during one of the most emotional periods of your life.
That's usually not an ideal time to make irreversible financial decisions.
Unless there is a specific tax, estate, or distribution deadline requiring action, you may have time to understand what you've inherited before deciding what to do with it.
That might mean temporarily holding cash safely.
It might mean leaving investments where they are while you understand the accounts.
And it may mean assembling tax returns, estate documents, account statements, and other information necessary to see the complete picture.
The first objective doesn't need to be optimization.
It can simply be:
Don't make a major decision while you're still figuring everything out.
2. Understand What You Actually Inherited
"Inheriting $1 million" doesn't tell us nearly enough.
A $1 million inheritance could include:
- Cash
- A taxable brokerage account
- Individual stocks
- An inherited IRA
- Roth assets
- Real estate
- Business interests
- Trust assets
- Life insurance proceeds
Those assets can have very different tax rules and planning considerations.
For example, inherited taxable investments may receive an adjustment to their cost basis under current tax rules, while inherited retirement accounts can come with separate distribution requirements.
Before deciding what to sell or keep, understand what you own, how it is titled, what tax rules apply, and whether any deadlines exist.
This is one reason an inheritance can quickly become an estate-planning, investment-planning, and tax-planning conversation rather than simply an investment decision.
3. Understand Why Inherited Money Can Feel Different
There's actually a name for some of what happens when we become emotionally attached to inherited assets:
The endowment effect.
The endowment effect describes our tendency to value something differently simply because we own it.
With inherited assets, ownership can carry an additional emotional layer.
A stock isn't necessarily just a stock anymore.
It becomes:
"Dad's stock."
An investment account becomes:
"Mom's money."
A house becomes:
"The home my parents built."
Research on the endowment effect has found that inherited portfolios can be particularly difficult to change because an investment may become connected to the memory of a deceased parent or spouse. Selling or reallocating it can start to feel less like an investment decision and more like letting go of something that person gave you. Pasted text
That doesn't mean the emotion is irrational.
It might represent grief.
Gratitude.
Family history.
Or simply the feeling:
"They trusted me with this. I don't want to mess it up."
Those feelings are real.
The challenge is making sure the meaning attached to the asset isn't making the financial decision for you.
4. Ask Yourself the "New Money" Question
One of the most useful ways to evaluate an inherited investment is surprisingly simple:
If you didn't already own this investment and inherited the same amount in cash today, would you buy it?
Research on the endowment effect refers to a similar approach as a "new money" test because it shifts attention away from how you acquired an asset and toward whether you would choose to own it going forward. Pasted text
Imagine you inherit $500,000 of one company's stock.
If instead you received $500,000 in cash, would you invest all $500,000 into that company today?
Maybe.
Maybe not.
Or imagine your 85-year-old father leaves you a portfolio invested primarily in bonds because he needed income and stability.
Would you build that same portfolio for yourself at age 50?
Again, maybe.
But if the answer is no, that's worth exploring.
The purpose isn't to prove that keeping the investment is wrong.
It's to create some separation between:
How the asset came into your life
and
What role it should play in your financial life going forward.
The history of an investment can be meaningful without determining its future.
5. Ask What the Money Could Do for Your Life
Once you understand what you've inherited, zoom out.
Maybe the inheritance could allow you to:
- Pay off high-interest debt
- Increase your emergency reserve
- Invest more for retirement
- Build a taxable investment account
- Pay down a mortgage
- Help your children
- Fund education
- Buy or renovate a home
- Travel
- Give to charity
- Retire earlier
- Work less
- Create greater financial flexibility
There isn't a universal hierarchy.
The appropriate decision depends on what your financial life looked like before the inheritance arrived.
Someone with significant high-interest debt has a different planning problem than someone who was already financially independent.
That's why we generally wouldn't create an "inheritance portfolio" and plan around it independently.
We would incorporate the inheritance into the person's existing financial plan.
6. Decide How Much Should Be Invested
Once near-term needs are addressed, some inherited money may be intended for years or decades in the future.
That's when investment strategy becomes important.
But the appropriate portfolio isn't necessarily the portfolio you inherited.
The person who left you the money may have been:
75 years old.
Retired.
Living from the portfolio.
Extremely conservative.
Or perhaps they accumulated a concentrated stock position over decades.
You might be:
Still working.
Saving aggressively.
And investing for another 20 or 30 years.
Those are different investors.
Your inherited investments should eventually reflect your time horizon, your risk tolerance, and your financial objectives.
7. Don't Let Taxes Make Every Decision for You
Taxes matter enormously when managing an inheritance.
But:
"I don't want to pay taxes" isn't an investment strategy.
Before selling inherited assets, understand the tax consequences.
Depending on what you've inherited, considerations could include cost basis, capital gains, inherited retirement-account distributions, and the interaction with your broader taxable income.
That's where our tax planning process becomes relevant.
The objective isn't necessarily avoiding every possible tax.
It's making a good after-tax financial decision.
Sometimes paying a tax today can be preferable to maintaining an inappropriate investment solely to avoid realizing income or gains.
8. Separate the Memory From the Investment
Sometimes the hardest part of changing an inherited asset isn't financial at all.
It's the feeling that selling it means letting go of the person.
Those two things don't necessarily have to be connected.
Research around the endowment effect suggests that preserving a memento or another representation of an emotionally meaningful asset can sometimes make it easier to let go of the asset itself. The idea is to give the memory somewhere else to live. Pasted text
With a family home, that might mean keeping something meaningful from the property, creating a photo book, or preserving a piece of the home that carries memories.
With inherited investments, you might decide to retain a small number of shares in a company that was particularly meaningful to your parent while diversifying the majority of a concentrated position.
There's no requirement to do any of these things.
The broader point is:
You don't have to preserve the asset exactly as you received it to preserve what it means to you.
The memory can stay even when the financial strategy changes.
9. Give Yourself Permission to Use Some of It
This can be another emotional hurdle.
Some people feel comfortable investing inherited money but uncomfortable spending any of it.
Spending the principal can feel like spending Mom or Dad's lifetime of work.
But money is ultimately a resource.
If your parents spent decades building wealth so that their family could have greater security and opportunity, using some of that money thoughtfully isn't necessarily disrespecting what they built.
Maybe part of the inheritance helps you buy your first home.
Take your children somewhere meaningful.
Pay for college.
Support a cause your parents cared about.
Create financial security for your own family.
The important word is intentional.
There's an enormous difference between allowing an inheritance to disappear through uncontrolled lifestyle inflation and intentionally using a portion of it to improve your family's life.
10. Revisit Your Own Estate Plan
A significant inheritance can change your net worth almost overnight.
That means your existing estate plan may no longer reflect your financial life.
This can be a good time to revisit:
- Beneficiary designations
- Wills and trusts
- Powers of attorney
- Insurance
- Charitable intentions
- How you eventually want assets distributed
Our estate planning process focuses on coordinating those decisions with the broader financial plan.
Because eventually, the inheritance you received may become part of the inheritance you leave.
And if you expect to leave meaningful assets to your children, the planning shouldn't necessarily stop with deciding who receives what.
We've also written about how to prepare your children for an inheritance, including when to bring them into the conversation, introducing them to your advisors, sharing the stories behind the wealth, and helping them understand the responsibilities they may eventually inherit.
11. Think About What the Person Who Left You the Money Actually Wanted
This may be the most useful question of all.
Not:
"What would Mom have done with this investment account?"
But:
"What did Mom want this money to accomplish?"
Those are very different questions.
Maybe your parents valued security.
Education.
Family.
Generosity.
Independence.
Travel.
Hard work.
Opportunity.
Being a good steward of an inheritance doesn't require preserving every investment decision the previous generation made.
It means understanding what the wealth represents and then making thoughtful decisions about what it should accomplish next.
And sometimes the most useful question isn't financial at all:
What do I think I'm losing if I let this asset go?
Research on the endowment effect suggests that simply labeling someone's attachment as a "bias" isn't particularly helpful. The feelings underneath it — grief, identity, pride, or family memories — may be the very reason the decision feels so difficult. Pasted text
Understanding what you're actually trying to preserve can make the financial decision much clearer.
The Bottom Line
Receiving an inheritance isn't only a financial event.
It's often an emotional one.
Give yourself time.
Understand exactly what you've inherited.
Learn the tax implications.
Evaluate the investments based on your own circumstances.
Determine what the money can do for your financial plan.
And then make intentional decisions about what you want to preserve, invest, spend, and eventually pass forward.
The goal isn't to erase the history attached to the money.
It's to become its next good steward.
If you've recently received an inheritance and want help incorporating it into your investments, taxes, retirement, and estate plan, you can start a conversation with our team.