Receiving an inheritance, whether large or small, often comes with a wide range of emotions, from the grief of losing a loved one to the hope and excitement about the possibilities the inheritance may create. According to Northwestern Mutual’s 2025 Planning & Progress study, over half (57 percent) of Americans who expect to receive an inheritance view it as critical to their long-term financial security. Despite this high reliance, many people lack adequate preparation or guidance to manage inherited funds effectively.
For California families dealing with inherited wealth, the stakes can be particularly high given the state’s complex tax environment and unique estate planning considerations. If you are about to receive an inheritance, there are several strategic planning steps that you can take to help ensure inherited funds last longer than a few years.
- Avoid Making Hasty Decisions
The initial mix of excitement and grief when receiving an inheritance can lead to impulsive financial decisions. Resisting the urge to make significant decisions immediately is one of the most critical steps. Instead, it’s important to follow a few best practices:
- Secure your inheritance first. Before you do anything else, transfer the inheritance to a secure account such as a high-yield savings account, a money market account, or a short-term certificate of deposit (CD) until you’ve had the opportunity to develop a long-term financial plan.
- Build your emergency fund. If you don’t already have one, consider establishing an emergency fund that covers at least six months (or whatever amount of time feels right to you) of essential living expenses. Those with existing emergency funds often benefit from expanding coverage to a full year.
- For married recipients, decide on account ownership. Married individuals need to decide early whether to keep the inheritance in their separate names or place the funds in jointly-owned accounts. This decision has significant legal and financial implications, particularly in the event of divorce or outstanding spousal debts. Consulting with an attorney on this point is highly recommended.
- Understand gifting implications. Those considering giving a portion of their inheritance to children, other loved ones, or charity should seek professional advice before proceeding. Certain gifts exceeding the annual exclusion amount may result in gift tax liability or reporting requirements.
- Invest in Your Future: Prioritize Retirement and Debt
For many, an inheritance presents a significant opportunity to enhance long-term financial security.
Maximize retirement savings. Working individuals should consider increasing their contributions to retirement accounts, especially if they are not currently contributing enough to receive employer matching. Opening and fully funding an individual retirement account (IRA) each year can be valuable due to its tax advantages and compounding growth potential.
Strategically manage inherited retirement accounts. Those inheriting a traditional IRA or 401(k) face complex rules that may impact tax minimization. Under current law, most nonspouse beneficiaries are subject to the 10-year rule, requiring withdrawal of the entire account balance within 10 years following the original owner’s death—potentially leading to significant income tax consequences. For California residents, this challenge is compounded by the state’s high income tax rates, making strategic distribution timing particularly important to avoid pushing beneficiaries into higher combined federal and state tax brackets. Spouses often have more flexible options, including rolling the inherited IRA into their own IRA (called a spousal rollover). Professional guidance may be valuable for navigating these complex rules and optimizing inheritance outcomes.
Eliminate high-interest debt. Using a portion of inheritance to pay off high-interest consumer debts, such as credit card balances or personal loans, often provides greater benefits than potential investment gains. For those inheriting California real estate, consider Proposition 19 implications before deciding whether to keep, sell, or rent the property, as these decisions can significantly impact ongoing property tax obligations.
- Consider Building a Team of Professional Advisors
Navigating a significant inheritance can be complex, and attempting to manage it alone often leads to missteps. Building a team of professional advisors may be valuable for developing comprehensive, long-term strategies designed to help protect and grow inherited wealth. These professionals can work collaboratively to address various aspects of your financial picture.
- Financial Advisor: Financial advisors assist with analyzing current economic situations and establishing solid foundations; developing investment strategies tailored to risk tolerance and goals; managing credit and debt; planning for specific goals such as college savings, home purchases, or retirement planning; and exploring charitable giving options.
- Insurance Agent: Insurance agents help determine appropriate coverage for individuals, loved ones, and property. They review existing coverage and advise on insurance needs (life, long-term care, and liability) designed to help safeguard financial futures.
- Accountant or Tax Professional: Knowledgeable tax professionals help clients understand inheritance tax implications (such as stepped-up basis rules for capital gains); optimize cash flow and minimize income taxes where possible; and navigate tax consequences of planned gifting.
- Estate Planning Attorney: Estate planning attorneys help clients work toward securing their own legacy by creating or updating estate plans (wills or revocable trusts, medical powers of attorney, advance directives, and durable financial powers of attorney); developing strategies designed to decrease or eliminate potential federal or state estate taxes; structuring gifting strategies to achieve charitable goals and pass values to the next generation; and implementing strategies designed to help protect inheritance and other assets from potential creditors and future lawsuits. California families often face additional complexity with state-specific tax implications, while international families—about 25% of my clients—may need specialized coordination with cross-border tax treaties and foreign reporting requirements.
Secure Your Legacy
An inheritance, regardless of its size, presents a significant opportunity. With careful planning and appropriate professional support, it may provide lasting financial security for you and future generations. However, success depends on thoughtful decision-making and ongoing management.
As a Certified Specialist in Estate Planning, Trust & Probate Law by the California State Bar Board of Legal Specialization, I help individuals navigate the complexities of receiving, growing, and ultimately passing on inheritance to their loved ones. For California families, particularly those with international connections, the planning considerations can be especially complex.
Ready to discuss your inheritance planning needs? Contact our Los Altos office at (650) 405-0711 to schedule a consultation about how strategic planning can help you maximize the benefits of your inheritance while protecting your family’s future.
