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Leaving inheritance money for your heirs is a considerate act of generosity. However, if not handled carefully, it can be stressful and problematic. A study by Ameriprise Financial indicates that while 83% of people want to leave an inheritance, only 64% feel they are on track to do so.
This is largely due to the complexity of the task and the emotion it evokes. First, there is a lot of uncertainty regarding whether it’s better to gift the money now or bequeath it at death. Then, there’s self-induced pressure to leave at least an average inheritance. For many, there’s also stress associated with deciding how to divide the money amongst multiple heirs.
Receiving an inheritance can be both a blessing and a challenge, especially when you’re trying to figure out whether your inheritance is considered “small” and how best to manage it. As someone who’s helped many clients navigate this territory, I wanted to create this comprehensive guide to help you understand what constitutes a small inheritance and how to make the most of whatever amount you receive.
Defining a Small Inheritance: It’s All Relative
So what exactly is considered a small inheritance? Well, it’s not as straightforward as you might think!
Based on Federal Reserve data from 2016-2019, the average inheritance in the United States was approximately $46,200. However, this number doesn’t tell the whole story since inheritance amounts vary dramatically across different groups:
- The wealthiest 1% received an average inheritance of $719,000
- The bottom 50% received only $9,700 on average
- The median inheritance in 2016 was about $55,000
Given these figures, inheritances below $20,000 are generally considered “small” by financial experts. But remember, what seems small to one person might be life-changing to another!
Inheritance Distribution by Demographics
Inheritance isn’t distributed evenly across demographic groups. Here’s how it breaks down by race and ethnicity:
- White families received a mean inheritance of $88,500 (30% of participants received an inheritance)
- Black families received a median inheritance of $85,800 (10% of participants)
- Hispanic families received a median inheritance of $52,200 (7% of participants)
- Other families received a median inheritance of $59,400 (18% of participants)
Education also plays a significant role in inheritance patterns. Families with a college-educated parent typically receive about $17000 more in inheritance than those without a college-educated parent.
Why Small Inheritances Still Matter
Even if your inheritance falls below the national average, don’t discount its potential impact! A “small” inheritance of $5,000, $10,000, or $20,000 can still provide significant financial opportunities if managed wisely.
Think of it this way – an unexpected $10,000 could completely eliminate your credit card debt, fund an emergency savings account, or serve as the down payment on a reliable vehicle. These financial moves can dramatically improve your overall financial health and provide lasting benefits beyond the initial inheritance amount.
Smart Ways to Use a Small Inheritance
When you receive a small inheritance, it’s tempting to splurge on something fun or exciting. While treating yourself to something small isn’t necessarily bad, consider these financially savvy options for your windfall:
1. Pay Off High-Interest Debt
If you’re carrying credit card balances or personal loans with high interest rates, using your inheritance to pay them off can save you significantly in the long run. Eliminating a 18-24% interest rate is like getting an immediate return on your money!
2. Build an Emergency Fund
Financial experts recommend having 3-6 months of expenses saved for emergencies. If you don’t already have this safety net, your inheritance can provide crucial protection against unexpected events like medical emergencies or car repairs.
3. Invest for the Future
Even small amounts can grow substantially over time thanks to compound interest. Consider investing in:
- A retirement account like an IRA
- Low-cost index funds
- Education savings for yourself or your children
4. Make Home Improvements
If you own a home, strategic improvements can increase your property value while improving your quality of life.
5. Invest in Yourself
Sometimes the best investment is in your own skills and earning potential. Consider using your inheritance for:
- Additional education or certifications
- Starting a small business
- Tools or equipment that could help you earn additional income
What to Consider Before Making Decisions
Before deciding what to do with your inheritance, take these important steps:
Take Your Time
There’s no rush to make immediate decisions about your inheritance. Park the money in a high-yield savings account while you consider your options.
Evaluate Your Financial Situation
Look at your current financial picture, including:
- Outstanding debts
- Savings goals
- Retirement readiness
- Short and long-term financial objectives
Consider Tax Implications
While most inheritances aren’t subject to federal income tax, there may be other tax considerations depending on what you do with the money. For example, if you inherit stocks or property and later sell them, you might owe capital gains tax.
Seek Professional Advice
For inheritances approaching the higher end of “small” (like $20,000+), it might be worth consulting with a financial advisor who can help you maximize the impact of your inheritance based on your unique circumstances.
What About Larger Inheritances?
Inheritances over $100,000 are generally considered “large” and might require more complex planning. With larger sums, you’ll want to consider:
- More sophisticated investment strategies
- Potential tax planning
- Estate planning for your own heirs
- Possibly setting up trust accounts
Real-Life Example: Making the Most of a $15,000 Inheritance
Let me share how one of my friends handled a $15,000 inheritance from her grandmother:
Sarah had about $8,000 in credit card debt with an average interest rate of 21%. She was also trying to save for a down payment on her first home.
Here’s what she did:
- Paid off the entire credit card balance ($8,000)
- Put $5,000 into a high-yield savings account for her home down payment fund
- Spent $1,000 on a small memorial trip to her grandmother’s hometown
- Used the remaining $1,000 to take a professional development course that helped her get a promotion at work
By eliminating high-interest debt, Sarah improved her monthly cash flow by $250, which she now adds to her home down payment fund each month. The inheritance not only provided immediate financial relief but continues to improve her financial situation years later.
Common Questions About Small Inheritances
Do I have to pay taxes on a small inheritance?
Generally, you don’t need to report inheritance money to the IRS because inheritances aren’t considered taxable income by the federal government. However, earnings made from the inheritance (like interest or investment gains) may need to be reported.
How long should I wait before spending an inheritance?
Financial experts often recommend waiting at least six months before making any major decisions about an inheritance. This gives you time to process your emotions and make rational financial decisions.
Should I tell friends and family about my inheritance?
This is a personal decision, but many financial advisors recommend being cautious about who you tell. Unfortunately, even small inheritances can sometimes lead to requests for loans or gifts from friends and family.
Final Thoughts
Remember, there’s no “right” way to use an inheritance – the best approach depends on your unique financial situation, goals, and values. What matters most is that you take the time to consider your options and make intentional decisions rather than spending impulsively.
A small inheritance might not be life-changing in the way a million-dollar windfall would be, but it can still provide meaningful opportunities to improve your financial health and build toward your goals. With thoughtful planning, even modest sums can have a lasting positive impact on your financial future.
And hey, if you’re expecting to leave an inheritance to your own loved ones someday, this understanding might help you set clear expectations and communicate effectively about your estate plans. After all, even small inheritances can be meaningful when they’re planned and managed with care.
Have you received a small inheritance? How did you decide to use it? I’d love to hear your experiences in the comments below!
What Is Considered a Small Inheritance?
Based on the same Federal Reserve survey, a small inheritance can be characterized as one that falls below the $46,200 average. That said, any inheritance is a blessing and should be graciously accepted, especially when considering how less than 30% of individuals receive one.
Evaluate the Inheritor’s Understanding of Money
Before giving an heir $1 million dollars or even $50,000, make sure they won’t spend it without some thought and planning. To get a better feel for how your heir will handle a large sum of money, give them a test run with a few thousand dollars.
Observe if the heir invests the money, spends it or pays off debt. This will give you a good idea of how they might use larger amounts of money.
If the heir uses the money wisely, you could bequeath the full amount of the inheritance outright. However, if you doubt the heir’s judgment, you may choose to place the money in a trust or purchase a single-premium deferred annuity in their name.
If a test run isn’t feasible, ask yourself the following questions to get a better sense of your heir’s relationship with money:
- Do they spend money on a whim?
- Do they rely on debt?
- Do they have a stable job?
- Do they stick to a budget each month?
- Do they have money set aside for emergencies?
- Do they invest for the future?
