Inheriting money can change your life. To figure out how to use an inheritance to improve your financial situation, you need to look closely both at the assets you receive and what you've already accumulated on your own. However, you also have to pay attention to wishes that your parent had for the money you inherit, whether they are expressed formally through legal documents or informally in conversations you had over the years. By considering your relationship with your parent, an inheritance becomes more than just money and takes on an intangible quality as a lasting legacy of your parent's life. Whether or not you're legally obligated to use your inheritance in a particular way, following a parent's wishes can help create a sense of respect and honor throughout your family.

Legal and tax considerations
Not all inheritances involve receiving a big check shortly after your parent's death. Among wealthy families, it's common to see more complicated legal arrangements that define how children inherit wealth from parents. For instance, by setting up a trust either during their lifetimes or through a provision in their wills, parents have great latitude in naming the conditions under which their children may receive trust assets or income. Depending on the specific provisions, you may need to use the money for specific purposes or wait until you reach a certain age before receiving the bulk of your inheritance. In some cases, a parent's intent may be to have assets available for the needs of not only children but also grandchildren and other future generations, which may require the fiduciary that manages the trust to weigh the immediate needs of children against the potential future needs of other family members. Other arrangements, such as charitable remainder trusts or gift annuities, may give heirs a stream of income that can last as long as they live before any remaining assets pass to charity.

These legal arrangements can have several effects on surviving family members. First, they may severely limit access to the parent's assets. This is not necessarily bad; if a person lacks the maturity to deal with an inheritance responsibly, then such measures ensure that there will be assets remaining beyond the immediate future. Second, they can persuade the survivors to take certain actions or change behavior. For example, if a trust allows assets to be spent on education, then a surviving child might take the opportunity to return to school for additional training that can enhance career opportunities. Third, they can encourage families to think in terms of the overall family unit rather than breaking into individual factions and subgroups.

Some arrangements also have tax implications. For instance, if your parents used a bypass trust in their estate planning, then some of the assets you inherit may not have their tax basis increased when you receive them. Especially if your parents had highly profitable stocks like Altria Group (NYSE:MO) or Google (NASDAQ:GOOG), you might have to pay large capital gains taxes if you choose to sell such assets. Trusts and other streams of income may also be taxable to you in ways you won't necessarily expect. If you inherit money that your parent held in an IRA, then there are special factors to consider in order to take maximum advantage of tax deferral.

It's often a good idea to discuss the nuances of your inheritance with your parent's attorney and accountant to make sure you understand any hidden ramifications of particular strategies your parent used. The last thing you want to do is ruin the well-laid plans your parent may have worked a lifetime to make.

Going beyond legalities
In typical families, legal documents aren't the determining factor in what one does with an inheritance. The expense of formalizing a parent's wishes leads many parents to rely on the good faith of their children to use inherited money wisely. For instance, your parent may suggest to you that you put aside the money you receive toward the costs of college education for your own children. Although there may be nothing that legally prevents you from using the money in any way you want, your own values may dictate setting up a 529 plan or other college savings account with your inheritance to follow your parent's wishes.

Some parental instructions are harder to follow than others. If your parent was extremely conservative with money, then you may be asked not to invest your inheritance in any but the safest of investments, such as bank CDs or Treasury bills. Other parents who invested more aggressively may tell you never to sell a particular stock. In such cases, you may find your parent's instructions at odds with the opinions of professional advisors and others whose opinions you trust. In order to make the most of the money you receive, you may need to disobey your parent's wishes. Hopefully, you can comfort yourself with the knowledge that your parent would want what's best for you and your family.

When you're dealing with the loss of a parent or other loved one, financial issues like an inheritance may seem unimportant. By making the most of the money your parent leaves you, however, you can honor your memories and pass on your parent's legacy and values for generations to come. Please see the first and second parts of this article for futher information.

Related articles:

If you're looking for some help in making sure your finances are in order, take a look at The Motley Fool's GreenLight personal finance service. GreenLight provides step-by-step plans to help you make the right moves with your money. You can check out GreenLightfree for 30 days.

Time is running out for the 2006 Foolanthropy charity drive. Take a look at the five great charities chosen for this year's event, and click the links from there to make a donation today. Thanks for your support.

Fool contributor Dan Caplinger has gone through parental inheritances twice with relatively few bumps along the way. He owns shares of Altria Group. The Fool's disclosure policy is like a family friend.