After the passing of a loved one, you may discover that you’re receiving an inheritance. While you might be grateful for an influx of wealth, you may be anxious about how to utilize your inheritance properly. That’s why it is crucial to act slowly and carefully when inheriting part of someone’s estate, especially when considering the emotional difficulties of losing someone close to you.

If you are wondering what you should do with the money, here are four steps to help you make smart decisions about your newfound inheritance.

Take a Deep Breath

It is normal to feel confused, upset or overwhelmed. Give yourself a couple months to cope with the event before taking action on the windfall. In the meantime, it’s a good idea to park your inheritance in a high-interest savings account or certificate of deposit.

Understand What You Inherited

Before determining what to do with your inheritance, you need to know what assets you have received. A typical legacy will come with one of these four forms:

Cash

It is available to be allocated in any means without liquidating. However, you may need to keep most of the money in hand for taxes purposes.

Real Estate

If you receive real estate assets, transfer of deed paperwork needs to be completed before you can do anything with the property. Then, as the inheritor, you must decide whether to sell or keep the property.

Trust Account

If you inherit assets through a trust, the documents stipulate how the assets are divided or who manages the trust assets. Trust assets can be distributed at once or in installments.

Retirement Accounts

Retirement accounts can be one of the most complicated inheritances due to the strict guidelines and tax implications. Depending on your relationship with the deceased person, you may have to take the money out of the account by a specific time frame. Consult a financial professional to educate you about the best route for these inherited assets.

Once you have a solid understanding of the assets you have received, it’s time to analyze your financial needs and goals.

Discuss Your Goals and Dreams

Have you ever thought about what you would want to accomplish if you had more money? An inheritance might be an opportunity to make those dreams a reality.

For example, you may want to use your inheritance to tackle some things you have been putting off because of financial reasons, such as buying a house or taking a family vacation.

On the other hand, you may want to help save for a grandkid’s college education or help fund your retirement account.

While you may have inherited enough to cross off many of the goals on your list, it is critical to invest for your future. In many cases, you will have to prioritize and find a balance.

Here are some good areas to start with:

Contribute to an Emergency Fund

An emergency fund is a savings account that protects you from financial emergencies, like medical bills or home maintenance costs.

Tackle High-Interest Debt

Paying off high-interest debt, like credit cards or student loans, can help you save on hefty interest charges.

Reduce or Pay Off Your Mortgage

Reducing or paying off your mortgage can help you save on future interest payments and lower your monthly expenses.

Watch Out for Taxes

It is uncommon for someone to receive an inheritance large enough to trigger federal estate taxes. However, estate taxes will vary at the state level. Therefore, depending on which type of assets you inherit, you may owe inheritance or estate state taxes on some of your assets. In addition, if you decide to sell some of your inherited assets, you could trigger a capital gains tax.

Since everyone’s situation is unique and tax laws change frequently, I suggest consulting with a professional when liquidating your inheritance.

Make The Windfall Count

Receiving an inheritance can change your financial picture. When considering what to do with your windfall, give yourself time to grieve and evaluate your options. Don’t be afraid to lean on a tax, law, or financial expert to get up to speed on any tax and legal implications.

Taking the time to consider your options and being responsible with your inheritance will help ensure your financial future and honor your loved one’s legacy.

Let’s Have a Conversation:

What are some difficulties you have experienced with inherited assets? If you have received inherited assets, how did you decide how to use them? How did you make a windfall count?