Imagine you have just received a substantial inheritance. Whether you anticipated receiving it or it was a complete surprise, it is important to consider how you will use this gift thoughtfully and strategically.
The gift of an inheritance typically comes with the loss of a loved one. It is essential to give yourself time to grieve and process your loss before you make any financial decisions.
What to Do With an Inheritance:
Before making plans for your inheritance, wait until the probate and distribution processes are complete. Your benefactor may have incurred some end-of-life bills that must be paid before you receive your financial gift.
Probate can take weeks or months to complete. Probate typically takes about nine months, but it can take longer for more complex or challenged estates.
Inheriting Cash Gifts
If you inherit cash, consider depositing it in a federally insured bank or credit union. Financial institutions insure these accounts up to $250,000 per depositor, per financial institution. If you inherit more money than one institution can insure, you can open accounts at several banks.
Parking your cash in a bank account allows you to take your time making financial decisions. You may choose to pay off high-cost credit card or student loan debts, fund a retirement account, supplement your emergency fund, or develop an investment plan.
Talk with your fee-only financial planner to discuss how best to use your inherited cash. A fee-only financial planner does not receive commissions on investments sold; instead, they charge a fixed or hourly fee for their advice. Fee-only financial planning eliminates concerns about conflicts of interest when making investment decisions.
Inheriting an IRA or Retirement Account
Inheriting a retirement account from a parent comes with more requirements than inheriting cash assets. According to the 2019 Secure Act, the IRS requires that beneficiaries who inherit an IRA, 401(k), or other retirement account from a parent take the inheritance within 10 years.
These requirements may change as early as 2025. The IRS is proposing changes that would require non-spouse beneficiaries to take annual withdrawals from retirement accounts during the 10-year period over which they must take the inheritance.
If you inherit an IRA from a spouse, you have a bit more flexibility. You have the option to either rollover the IRA into your retirement account or maintain ownership of the original account.
If you choose a spousal rollover, your account may be subject to a 10% penalty if you take distributions before 59 1/2. Check to see if you must take the required minimum distributions from your account. This requirement is based on your age. If you haven’t already done so, you might also need to take the required minimum distribution on behalf of your deceased spouse in the year of their passing.
Inheriting a House
If you inherit a house, you may choose to sell it, rent it out, or keep it and live in it. Consider the cost of maintaining the home (local property taxes, insurance, utilities, and upkeep) when making these decisions. If you sell the home, you could owe capital gains taxes. These taxes are based on the value of the house when the person died and what it was sold for.
If the home is not paid off, you will be responsible for making the mortgage payments. Have the house appraised. Get a realistic estimate of how much it will cost to maintain the house. Determine how much value you will get from the house. Take into account any potential capital gains taxes and determine if the home qualifies for a step-up in base. When you inherit property, the IRS allows you to use the fair market value of the property at the owner’s death instead of the original purchase price to determine the property’s basis. Factor in any potential tax savings you may be eligible to receive.
Inheriting a home with siblings can complicate the situation. Everyone may not agree on whether to sell, keep, or rent the house. Selling the house and dividing the proceeds is typically the simplest option, but it does not work for every family situation.
If the tax implications or other factors make it undesirable to inherit a property, you may disclaim the inheritance and allow it to pass to the next eligible heir.
Inheriting through a Trust
A trust account is a legal arrangement in which a trustee has a fiduciary responsibility to hold the trust’s assets for the benefit of the trust’s beneficiaries. The trust document will stipulate how the assets will be invested and distributed to the beneficiaries. You may receive the assets as a lump-sum payment or in installments.
Most families have several competing financial goals to consider. An inheritance can help them reach some of these goals. A fee-only financial advisor can help you evaluate your current financial situation and determine how to best use your inheritance to meet your goals.
There is no one-size-fits-all guide to investment. Working with a wealth manager who uses a fee-only financial planning structure can ensure you make the best financial decisions for yourself and your loved ones.
