Smart Things Millennials Should Do With An Inheritance

by Sean Bryant on December 3, 2013

Millennials InheritanceYour inheritance was bittersweet. You lost someone you cared about, but he or she left you a nice little bundle, and you’re wondering how to spend it. As a member of Generation Y, also known as Generation Me-Me-Me, you’ve been stereotyped as materialistic and carrying a sense of entitlement. On the other hand, research also shows you’re practical when it comes to money, and you care more about being debt-free than previous generations did at your age, according to TRU Enrollment Insights.

Because you are a smart saving Millennial, you’re looking for practical advice on what to do with this windfall.

Pay Your Taxes

The good news is, the IRS does not tax inheritances. Some estates must pay income tax, but that will have been handled by the executor or administrator of the estate before you received your money. Also, if you invest your inheritance (which you should, and more on that in a minute), you’ll be taxed on earnings, just as you would for any money you earn from investments.

To see if your state charges an inheritance tax, visit Bankrate.com’s map. Most states follow the federal estate tax rule, but 16 do not. Again, you owe nothing to the IRS for your inheritance. It’s worth repeating because it’s so hard to believe!

Spend Your Inheritance Wisely

Before we get into the practical stuff, let’s talk about how much you can allow yourself to blow. Set a 10 percent limit on frivolous spending. Buy a car, take a trip, upgrade your wardrobe, get a new laptop, take your friends to dinner on you — but spend NO MORE than 10 percent of your inheritance.

Sell Your Inheritance?

Some families buy annuities to prepare for retirement, and they collect regular payments from them monthly or annually. If someone designated you as the beneficiary of his or her annuity payments after he or she died, you will continue to collect them. You could potentially sell those future payments to a company like J.G. Wentworth and receive one lump sum of cash sooner.

Before you do this, make sure the reason you cash out is worth the loss you’ll take by forfeiting future annuity payments. Paying off your mortgage and/or student loans is worthwhile, whereas buying a high-performance sports car isn’t as solid of a reason.

Some annuities have restrictions on how soon they can be sold, but your third-party agent will be able to walk you through the process.


Save and Invest The Rest

If you’ve already got a retirement account, use this inheritance as an opportunity to maximize your annual contributions. If you have children, sock some of it away in their 529 college savings plans. You can invest the rest in several ways.

Buy property

Convert your cash into real estate, and as your property increases in value, so does your net worth. Tough credit restrictions have created a cash-buyers market, so now is a good time to get in, according to Forbes.

Diversify investments

Don’t load all of your money into one stock or mutual fund. Spread it out among different types of investments. Talk to a wealth adviser at your bank.

Go back to school

If your inheritance is enough to support you through a two-year MBA, law school or other Master’s program, your earning power will increase and pay you back as long as you are in the workforce. Bloomberg Businessweek found that over a 20-year period, graduates of 20 MBA programs averaged a 90 percent increase in pay. The higher rated the MBA program, the higher the increase in pay.

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Sean Bryant

Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.
  • Laurie @thefrugalfarmer

    Love your tip about setting a 10% limit on frivolous spending – that’s a great way to ensure you have some “fun” with the money, but yet still use a large portion of it wisely too. Great post, Sean!

    • I am a firm believer that you always need to set aside a certain amount to buy yourself something out of the ordinary every once in awhile.

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