The best way to invest an inheritance involves pausing, assessing your goals (short vs. long-term), and creating a diversified plan with a financial advisor, often using tax-advantaged accounts like IRAs or 401(k)s, and spreading investments across stocks, bonds, and potentially real estate, balancing risk with growth for different timelines. Don't rush; hold funds in a high-yield account while planning, and consider consulting a professional to navigate complex assets like property or existing investments.
With more total assets, you may qualify for alternative investments such as private equity, hedge funds, real estate investments or direct investments in private businesses. “Alternatives offer the potential for enhanced returns and reduced risk that could be hard to find in public markets,” Curtin says.
What should you not do with inheritance money?
How does the IRS learn about inherited assets? Inherited assets may appear through estate filings, financial institution reporting, probate documents, property title transfers or tax reporting by executors and trustees.
Give more money away
Lifetime gifting is a straightforward way to begin reducing your IHT bill. By gifting money during lifetime, that would have been part of an inheritance anyway, you reduce the size of your estate so that there is smaller amount subject to IHT on your death.
You can typically inherit a large amount without federal taxes because the tax applies to the deceased's estate, not the recipient, and the exemption is very high: $13.99 million in 2025 and $15 million in 2026 per person, meaning most inheritances fall below this threshold. The key is that the estate's total value must exceed these limits for any tax to be owed by the estate. Inheritances themselves (cash, property) are generally not income, but earnings on them (like interest/dividends) or pre-tax retirement funds (like IRAs) are taxable.
The biggest blunder when it comes to inheritance and benefactors is not having a Will at all! If you pass away without a valid Will, or die intestate, there are rules set down by law that stipulate how the estate is to be administered. These rules of intestacy follow a hierarchy of who should benefit from the estate.
The "7-year inheritance rule" (primarily a UK concept) means gifts you give away become exempt from Inheritance Tax (IHT) if you live for seven years or more after making the gift; if you die within that time, the gift may be taxed, often with a reduced rate (taper relief) applied if you die between years 3 and 7, but at the full 40% if you die within 3 years, helping people reduce their estate's taxable value by giving assets away earlier.
What to do with an inheritance
The 10-5-3 rule is a simple guideline for long-term investment returns, suggesting 10% average annual returns for equities (stocks), 5% for debt instruments (bonds), and 3% for cash (savings accounts), helping investors set realistic expectations and build diversified portfolios balancing risk and stability, though these are historical averages, not guarantees.
Large inheritance ($500,000)
You could also use some of the money to remodel your house or buy a vacation property. Sometimes, people who inherit a large sum of money decide to invest it and preserve the principal, then use the proceeds to fund other expenditures.
Yes, you can give your son $100,000 tax-free in 2025 by utilizing the annual gift tax exclusion and your lifetime exemption, but you'll need to report the gift to the IRS on Form 709 since it exceeds the $19,000 annual limit, though you won't pay tax unless you exceed your much larger $13.99 million lifetime gift/estate tax exemption. The gift is considered yours (the giver) for tax purposes, not your son's.
Transfer assets into a trust
Because those assets don't legally belong to the person who set up the trust, they aren't subject to estate or inheritance taxes when that person passes away. Setting up a trust also has other financial benefits, such as helping the estate avoid probate.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax ranges from 18% to 40% and generally only applies to assets over $13.99 million in 2025 or $15 million in 2026.
However, there is a little-known IHT loophole that does not have a set limit or post-gift survival requirement, known as 'Gifts for the Maintenance of Family'. Any gift that qualifies under this loophole is exempt from IHT. If HMRC decide that the gift was larger than reasonable, the reasonable part is still exempt.
The most common methods for transferring wealth to another person are via gifts, trusts, and wills. A fourth option, Family Limited Partnership, allows family members to buy shares in a family holding company and transfer assets that way, often income tax-free.
By far the biggest mistake people make when it comes to IHT Planning is simply not taking action. The issue with IHT and Estate Planning is that it is almost always something that 'can wait' until tomorrow (until it can't of course).
You can deposit a large cash inheritance into a savings account, either by check or by wire transfer to your bank.
The IRS can take your inheritance if you owe back taxes. The reason is that once the executors transfer assets to you, they become part of your estate.
How does the IRS know if I've given a large gift? The IRS requires you to file Form 709 if you give a gift to any individual that exceeds the annual exclusion amount during the tax year.