SKIP TO CONTENT
By Eric Croak · Updated April 7, 2026
Every culture has its own way of saying the same thing: inherited wealth rarely lasts.
In English, it’s “shirtsleeves to shirtsleeves in three generations.”
The Japanese say, “the third generation ruins the house.”
And in China, they say that “wealth does not pass three generations.”
A 25-year study of 3,250 families by the Williams Group confirms the pattern: 70% of families tend to dissipate their wealth by the 2nd generation, 90% by the third.
It’s rarely because the heirs were irresponsible. More often, they simply weren’t prepared. There was no plan, no investment discipline, no experienced team to help navigate the complexity, and no family structure to guide the decisions that suddenly needed to be made. This article walks through the most common mistakes people make after inheriting significant wealth and what you can do to avoid them.
Mistake #1: Making Big Purchases Too Soon
Windfalls are tempting. That’s not a character flaw. It’s human.
But people who make large purchases too soon often come to regret it. Buying a new car, a boat, or booking an expensive vacation feel earned in the moment. But they tie up cash you may need sooner than you expect, and every dollar spent on consumption is a dollar that stops growing for you. Enjoy your life. That’s part of what this is for. But think of your inheritance as the foundation it can be, not a windfall to work through.Tip: Think of inherited wealth as capital, not income. When you put capital to work through investments or productive assets it can generate income. Spend from the income. Protect the capital.
Mistake #2: Not Having a Plan
If you can, have a plan before the money arrives.
Write out your priorities. Identify what you owe, both short-term and long-term. Map out payment deadlines and set aside what you’ll need to cover the obligations that come with the estate. Then list your goals in order of importance, figure out what each one costs, and allocate your funds with intention. That kind of clarity will do more to protect your inheritance than almost anything else.
Mistake #3: Retaining Advisors You Have Now Outgrown
Not every financial advisor is equipped to work with clients at the multi-million-dollar level. That’s reality, not criticism.
The advisor who helped you before may not be the right fit for where you are now. Business interests, insurance structures, pension plans, and estate planning at this level require a different depth of experience. If your inheritance has significantly changed your financial picture, look for advisors who have worked specifically with inherited wealth, estate planning, and coordinated investment management. You will likely need to build a team: a wealth manager, a business broker, insurance professionals, a tax professional, a real estate professional, and an estate attorney. Getting the right people in place early makes everything else easier.
Mistake #4: Underestimating Inherited Liabilities
Most people don’t inherit a pile of tax-free cash. What they inherit is a collection of assets: properties, investments, retirement accounts, ongoing businesses.
Each of those comes with its own obligations. For example:
- employee payroll and benefits costs
- debt repayments and accounts payable
- tax obligations
- contractual fulfillment obligations
- insurance premiums
- property management fees
- deferred maintenance
- legal and accounting fees
- ongoing operating costs
The asset may still be genuinely valuable, even after accounting for all of this. But before making any major decisions or committing significant cash, take the time to understand the full picture. Look carefully at both sides of your balance sheet, including what’s coming in and what’s going out. Without that clarity, a large, unexpected payment can catch you completely off guard.
Some holdings that look attractive on the surface may be quietly consuming cash or building long-term liabilities. The sooner you spot those, the better your options. We generally suggest giving yourself six to twelve months after inheriting a business or other complex asset before making any major new financial commitments.
Mistake #5: Taking Money Out of Inherited IRAs Too Quickly
When people inherit large IRAs, 401(k)s, or other retirement accounts, it’s common to take the full balance out at once. There are bills to pay, priorities to address, and life doesn’t pause. But it’s almost always a costly mistake. When you inherit a traditional IRA, 401(k), or other tax-deferred retirement account, every dollar you withdraw is generally taxable as ordinary income. Taking it all at once can push a large portion into significantly higher tax brackets at the federal, state, and local levels, and can also trigger higher capital gains rates, increased taxes on Social Security benefits, and higher Medicare premiums under IRMAA rules.
Note: Waiting too long creates its own problems. If you delay all distributions until year ten, you could face a larger tax hit than if you’d taken everything in year one. And tax rates may be higher by then. Spread out your inherited IRA/401(k) withdrawals.
By law, most non-spouse beneficiaries have up to ten years to withdraw an inherited IRA balance. Spreading those withdrawals across the full ten years, rather than taking a lump sum, keeps more of your income in lower tax brackets. In most cases, you’ll keep significantly more of the money.
Mistake #6: Tying Up Capital in Illiquid Investments Prematurely
Once word gets out that you’ve received a large inheritance, investment proposals tend to follow. Investing is almost always better than spending. But even good investments can be far easier to get into than to get out of. Take real estate, for example. It comes with transaction costs, down payments, insurance, loan interest, property management fees, and ongoing carrying costs. It isn’t easy to sell quickly when you need liquidity, and a fast sale may still leave you short of what you put in. Private placements, private lending, and private equity funds can lock up your capital for years as well.
Private investments and real estate can absolutely play a meaningful role in a well-built portfolio. Just don’t commit capital before you fully understand where you stand, and what you need to stay there.
Mistake #7: Failing to Update Your Own Estate Plan
One of the first things to do after inheriting millions is to establish or update your trust structures, both revocable and irrevocable, as needed. Then update the title on each inherited asset to reflect the new ownership, whether that’s in your name or transferred to a trust. Work with an attorney on retitling real estate as doing it right the first time matters.
Keep in mind that minor children and individuals with certain disabilities cannot directly inherit assets; a trust with a trustee to manage their share is usually the right solution. Also update the designated beneficiaries on all inherited IRAs, 401(k)s, annuities, and similar accounts, and review your will to make sure it reflects everything you now hold.
Mistake #8: Keeping a Family Home You Can’t Afford
Sentimental value is real. No one is asking you to pretend otherwise. But holding on to inherited real estate the family can’t afford to maintain is one of the most common mistakes we see, as well as one of the most avoidable.
Inherited real estate comes with real costs: property taxes, insurance, utilities, deferred maintenance. A property that looks like an asset can quietly become a drain on everything else.
We understand the pull to keep a family home. But run the numbers soon after you inherit it. If you can’t maintain the property the way it deserves, it’s okay to sell and use those proceeds to acquire something that truly works for your family.
That’s not a betrayal of the people who left it to you. It’s how you honor what they built.
Mistake #9: Running the Family Business into the Ground
An inherited business is often the most complex asset a person will ever take on, and the one most easily destroyed by a difficult transition.
Research from Northeastern University found that unprepared family successors frequently push businesses to the edge of failure or past it.
The numbers tell the story. According to Cornell University, about 40% of U.S. family-owned businesses make it to the second generation. Only about 13% make it to the third. If you inherit an operating business, you need to make an honest decision about whether you’re the right person to run it, quickly.
There’s no shame in saying no. A business sold to capable hands is worth far more than one slowly run into the ground. In many cases, the best short-term move is to promote a trusted employee to a general manager role and pay them well to keep things running while you find a buyer. Owners of complementary or competing businesses are often a good place to start, and a business broker can help. You may also need to make some upgrades, particularly in technology, before you can command a strong sale price. Talk to your key employees, bring in outside help if you need a fresh perspective, and engage good advisors early. The one thing that rarely works: holding on to a business you’re not equipped to run.
Mistake #10: Neglecting to Build a Governance and Trust Infrastructure
Families that hold on to wealth across generations don’t just manage a portfolio well. They build structures that give the next generation the tools to carry it forward including governance, trusts, and education. Every family is different, but a thoughtful governance framework might include a family constitution, a family advisory board, trusts with clear distribution rules and spendthrift protections, and a program to prepare younger family members to one day receive and responsibly steward what you’re building now.
Frequently asked questions:
Stop. Before you sell, spend, or distribute anything, take a full inventory of every asset and every liability attached to it. Then bring in a financial advisor, an estate attorney, and an accountant so you can build a real plan before you make decisions that can’t be undone.
It depends on what you’ve inherited.
The federal government taxes estates above the exemption threshold, which is $15 million per person as of 2026. Many states have their own estate taxes, often starting at much lower levels. In most cases, the probate court settles those taxes before anything is distributed to heirs.
A handful of states including Kentucky, Maryland, Nebraska, Pennsylvania, and New Jersey, also impose a separate tax on the inheritance itself.
If you inherit a traditional IRA, 401(k), or similar tax-deferred retirement account, you’ll owe income tax on every dollar you withdraw. Most adult non-spouse heirs have up to ten years to take those distributions. Getting a distribution plan in place early with the help of a financial or tax professional can save you a significant amount of money.
That depends on your capabilities, your available capital, and the health of the business itself. Don’t hold on out of loyalty alone. A business that isn’t being managed well loses value faster than one passed to someone who can run it. At Croak Capital, we work with families facing this decision regularly and we know it’s rarely simple.
Also Read:
How to invest $5M+ after selling my company: Do I need a family office
Why Ann Arbor Professionals Should Work with a Fiduciary Financial Advisor
Risks of keeping $5M+ in one bank: how do UHNW families manage wealth safely
What a Fiduciary Approach Means for Post-Exit Entrepreneurs and High-Net-Worth Families