My aunt’s estate is giving me $100K – how can I make this money last a lifetime?

Receiving a small inheritance can be a blessing, even when it is not a windfall. Every little bit helps towards growing your retirement nest egg. So long as you nurture it and help it grow, it can last you a lifetime.

It might not be a game-changer when it comes to your retirement planning, but it can serve as a catalyst to advance you closer to your goals. So don’t plan on quitting your job with the small cash infusion, but look at it as a stimulus check to get your retirement strategy in gear.

The question of what to do with a small inheritance was brought to mind when a Redditor posted on the r/inheritance subreddit said an aunt was bequeathing from her trust along with an additional $35,000 in an IRA. The catch was, there were 28 people listed as beneficiaries.

He was looking for help on the implications for taxes, particularly when there was a long list of recipients, how to locate a financial planner, and how to make the money last a lifetime.

Now I’m not a financial planner or a tax expert, so these are just my opinions, but the fact the Redditor recognized he should speak with both is a good first step.

The taxman cometh

Let’s tackle the easy one first. The $100,000 trust cash can be pocketed tax-free.There is no federal inheritance tax, unless the estate tops $13.6 million. Only five states — Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — slap on an inheritance tax, and rates vary by kin. 

Because the Redditor is not a close enough relation to his aunt, he may not be able to dodge the tax entirely if he lives in one of those states, but since the money is being split 28 ways, his share of the trust’s proceeds could drop  below some state exemptions, such as Nebraska’s, which is $25,000. In a no-tax state like California, there will be zero tax owed.

One caveat, though: if the trust earned income, such as dividends and interest, after his aunt’s death, the earnings will be taxable when the proceeds are received.

Securing your future

The IRA is trickier. If it is a traditional IRA, meaning contributions were made with pre-tax dollars, withdrawals will be hit as ordinary income. Divided by 28, the Redditor’s portion would be small if taken over a 10-year period as prescribed by the SECURE Act’s rules for non-spouses that requires an account to be cleaned out within a decade. It’s manageable, but it still stings, especially if the IRA is cashed out fast and the Redditor gets bumped up to a higher tax bracket.

For a Roth IRA, however, the proceeds of the account will be tax-free, so long as she held it for five years.

Overall, having 28 beneficiaries doesn’t matter for federal tax purposes. Each share is taxed individually. State-wise, smaller cuts might dodge thresholds, but it’s the individual’s amount that counts. While the total estate size could trigger federal estate tax (which would be paid before distribution), $135,000 split 28 ways suggests it’s under $13.61 million. 

From acorns, mighty oaks

Now, you’re also not going to live off your inheritance forever. The $135,000 total sounds sweet, but it’s no retirement jackpot. First, it is being split between 28 people so assuming they are all equal, the total will be $4,821. Depending upon where you live, that might cover a month’s worth of expenses.  At 40 years old, you would need to have $1.5 million to cover $60,000 in annual expenses until you’re 80 years old. 

That means you should focus on growing your cut over time. First, find a good financial advisor. Start with a fee-only fiduciary who get paid for their work, not commissions. Look for a CFP (Certified Financial Planner) with estate and investment experience. Although $135,000 isn’t millions, it’s enough to botch by choosing the wrong advisor. 

Keep in mind, investing the money involves risk. Stock markets tank. We saw the S&P 500 lose one-third of its value in a matter of weeks at the onset of the pandemic. That was followed by an 18% drop in 2022. Those hurt, but only on paper. You want to hold on for the long haul. 

Consider buying S&P 500 index funds. They have averaged 10% annual returns for the past century. While not every year is a banger, over time it evens out, which is why a buy-and-hold strategy is best.

Key takeaway

Taxes from your inheritance won’t be the death of you, but careful planning and making shrewd investments can turn your pittance into a windfall of a lifetime

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