What to do with inheritance money: Managing cash, securities and gifting strategies
Managing Director, Head of Wealth Management Banking & Liquidity
- Beneficiaries usually don’t have to worry about paying taxes on their inheritance, since taxes are settled before assets are distributed. Beneficiaries should speak with their personal tax advisors about any tax obligations when inheriting wealth.
- Organizing goals by short-, medium- and long-term time frames can help determine whether to save, invest or pay down debt.
- Education, retirement and charitable giving can all be funded strategically through cash or securities inheritance.
Inheriting wealth can be a transformative experience, offering opportunities for financial growth and security. However, it also comes with responsibilities and decisions that require careful consideration. Whether you've inherited a large sum of cash or a portfolio of securities, understanding how to manage these assets is crucial. Below, we walk through two scenarios and discuss options available to the inheritor.
Understanding the emotional impact of inheritance
Receiving an inheritance often comes with a complex mix of emotions: grief, responsibility and opportunity. Acknowledging these feelings is important for making decisions that reflect your personal values and family goals. Open conversations with family members and trusted advisors can help you navigate this transition and ensure your choices honor the wishes of your loved one.
This period also presents an opportunity for generational planning. By understanding the emotional impact, you can make decisions that support your values and aspirations for your heirs, such as establishing education savings accounts, engaging in charitable giving or implementing gifting strategies.
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Prepare for tax implications of an inheritance
- Income tax: Generally, cash inheritances are not subject to income tax. However, estate taxes may apply depending on the size of the estate and local laws.
- Planning for taxes: If you anticipate a tax payment, consider setting aside funds in a stable, targeted solution. Consulting with a tax professional can help you navigate these complexities and ensure compliance.
Optimize your cash strategy
To achieve financial stability and flexibility, it’s important to thoughtfully structure your cash holdings. You may consider an approach such as the following:
- Emergency fund: Set aside enough cash to cover three to six months’ worth of living expenses. This safety net can provide you peace of mind and help preserve your overall portfolio.
- Short-term reserve: Allocate funds for anticipated expenses in the next six to 18 months, such as a wedding, home purchase or car, for example. This helps avoid selling investments during market downturns.
- Opportunity fund: Reserve some cash as “dry powder” for future investment opportunities. This portion can be invested in less volatile assets and deployed during market pullbacks.
Diversify your investments
Work with a financial advisor to build a strategy that matches your goals. A diversified portfolio helps spread risk and can offer a balanced approach to growth and income. Your advisor may suggest strategies to help reduce your tax obligations, including:
- Maximizing retirement contributions: Take advantage of tax-advantaged retirement accounts like IRAs or 401(k)s to grow your wealth and benefit from tax savings.
- Opening a 529 college savings plan: If you have children or wish to support a relative’s education, you may consider a 529 account. Contributions grow tax-free, and withdrawals for qualified education expenses are also tax-free. Some states offer additional tax benefits.
- Charitable giving: Donating to charities allows you to support causes you care about and may provide tax deductions.
- Donor-advised funds (DAFs) and charitable trusts: DAFs offer tax-efficient giving and generational transfer planning. Charitable trusts can provide income to family members while benefiting charities. Speak with your personal tax and legal advisors about establishing a DAF or charitable trust.
Consider gifting some of your inheritance to family members
You may wish to share your inheritance with loved ones. You can gift up to a certain amount annually to family members or friends without incurring gift taxes, reducing your taxable estate while supporting those close to you.
- Trust planning with your estate planning attorney: Gifting assets through irrevocable trusts can potentially reduce or eliminate transfer taxes and avoid probate. Consider options like Crummey trusts, which allow annual exclusion gifts, and trusts for minors (e.g., custodial accounts, etc.).
- Annual gift exclusion: For 2025, the annual gift exclusion is $19,000 per individual or $38,000 per married couple. Consider using this to contribute to education savings plans (e.g., a 529 plan) or custodial accounts (i.e., Uniform Transfers to Minors [UTMA] and Uniform Gifts to Minors [UGMA] accounts).
Additional considerations when receiving an inheritance
There are a few other considerations you may want to take into account when deciding what to do with an inheritance:
- Collaborate with a financial planner to align your inheritance management with your goals and risk tolerance.
- Consider using funds to pay off high-interest debts, improving your financial health.
- Meet with your estate planning attorney and review your estate plan to ensure your wealth is distributed according to your wishes.
- Speak with your tax advisor about any tax implications of accepting your inheritance and your path forward.
The bottom line
At J.P. Morgan Wealth Management, our team is dedicated to supporting your success and guiding you through life-changing events like inheritance. We are here to help you manage your wealth wisely and plan for both current and future family needs. Reach out to us for personalized guidance and let us assist you in crafting a financial plan that honors your legacy and supports your family’s future.
Frequently asked questions about receiving an inheritance
Cash inheritances are not subject to income tax. Estate taxes, if owed, are paid by the estate before distribution. State inheritance taxes may apply depending on local law.
The cost basis of inherited securities resets to their market value at the date of death. This means any prior gains are eliminated, and only future appreciation is taxable when sold.
A common approach is to address short-term needs first: build an emergency fund and reduce high-interest debt. From there, you can allocate funds to medium- and long-term goals.
Yes. Cash can be contributed to a 529 plan, which allows for tax-free growth and qualified withdrawals. Securities must be sold before contributing cash proceeds.
In 2025, individuals can give $19,000 per recipient, or $38,000 for couples splitting gifts, without using their lifetime estate and gift tax exemption.
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Managing Director, Head of Wealth Management Banking & Liquidity
