First of all, my sincere condolence for your loss.
On the inheritance front, I'm not sure what state you live in but unless the inheritance is over $5m I believe you should be exempt from federal estate tax on the money. Each state varies on their estate tax laws so you may still take a hit.
Regarding what to do with the money, if it is a very hefty sum I'd probably pay off your student loans, your house and any other debt you are paying interest on. If you are planning to have children maybe set up a college fund for each of them that you can contribute to over time and they can know it came from their grandmother.