CW: "We owe about $700 in a credit line with the bank. So that's going to get paid off."
CW: "Other than about $12K in student loans at about 5% interest we carry zero debt. I guess we could pay that off but 5% isn't that much and my feeling is the money can be better spent."
Remember, any debt you pay off is the same as investing that money and earning a return the same as the interest on the debt. If you can find an investment to put the $10,000 that will do better than the interest rate on the loan...do it.
Plus...since this is an unexpected windfall, there are "psychological" advantages to opening an investment account. In other words, way back in business school in one of my investing classes, they taught us that in cases like yours, there is an advantage to opening a small brokerage account and learning about investing that will be advantageous, in the long run. Paying off the loan at this time can be good but since that payment is in the budget, you should continue to pay that amount back to yourself in the form of a monthly investment.
CW: "Buying a home right now isn't an option, but will be possibly within the next year."
Good move (No pun intended) The standard rule of thumb on buying a house is that you want to stay in it longer than two years. If you are planning on moving in two years, you will probably want to continue leasing.
CW: "So I'd like to put it in something that will be better than a simple savings account, but will stay relatively liquid in case we do need it to put a down payment on a house or something."
You may want to "split the difference" and pay off part of the loan and open a brokerage account. I would not put it in a savings account as it will earn you diddly squat. I understand the desire to keep it liquid.
Here is what I would do.
Put $1,000 into a very liquid account. This is for when you blow a tire and have to replace two tires at once, your washing machine breaks and it needs to be replaced. (Unbudgeted items that just happen.)
Open a Schwab Account (Or similar) with $5,000.
Pay down the loan by $4,000 (Currently, 5% is a pretty good return.)
CW: What are some possible options here? I guess I also have to think about the tax implications too.
Since it went through an estate, you will probably receive a K-1 statement (I believe that is correct) that needs to be filed with your return. I will most definitely defer to the accounts on this one.