How to manage an inheritance: Tips for handling inherited wealth - Bruce Williamson

Effectively navigate the process of receiving and managing inherited wealth with this guide.

Receiving an inheritance often comes at a highly emotional time when you may be grieving. It may even create more financial stress than it relieves.

While the details may initially seem complex or difficult to process, we can help guide you through the implications of managing your inheritance and how it fits with your overall financial goals.

These steps can help you prepare for the inheritance process:

1. Know it may be a slow process

When preparing to manage your inherited wealth, keep in mind that the rate at which you will receive your inheritance will depend on the type of asset you stand to inherit, as well as the disbursement method chosen by the person who passed away.

Inheritance scenario	What will happen?	Typical length of proceedings
If there is a will	The estate needs to go through probate, a court-guided process that determines how an estate's assets are distributed. The executor needs to gather documents, inventory and appraise the decedent’s assets, and then present the information in probate court. The executor will have to pay any outstanding bills, and any state and federal estate taxes before assets can be distributed to heirs.	Anywhere from several weeks to years, depending on the complexity of the estate and if the will is challenged.
If there is no will	A probate court must try to determine the wishes of the deceased. The court will appoint an administrator to act as executor and distribute the assets.	The process may likely be long and complicated; it could take months, even years.
If there is a trust	If you inherited an asset held in a trust, the trustee will manage the process of distributing the assets as specified in the trust’s provisions.	Because trusts avoid probate, assets will likely be transferred to the heir more quickly.
If you were named a beneficiary	Even though beneficiary designations supersede a will, the heir will still need to work with the executor of the estate to get everything properly transferred into their name. If the heir was named as a beneficiary of an account that has pay-on-death (POD) or transfer-on-death (TOD) provisions, these designations will allow the asset to go directly to the beneficiary upon the owner’s death.	Assets will be transferred quickly.

2. Take a pause

Regardless of whether you have advance notice of your inheritance, there’s no rush to make any decisions before you fully understand what you’ve inherited. Among other things, you’ll want to know the estimated value of the assets, the type and whether they’ll be available immediately or distributed over time.

If you receive cash, consider putting it somewhere safer, like a certificate of deposit (CD), savings or money market account, before deciding what you ultimately want to do with the money.
If you receive other kinds of financial assets — including securities, retirement accounts, real estate or an interest in a business — work with the executor of the estate to get the asset properly transferred into your name. When applicable, you’ll also need to record the step-up in basis, which establishes a new market value of the asset for tax purposes compared to when the previous owner purchased it.

Advice spotlight

When you receive an inheritance, take a moment to review your estate plan. In addition to including the inherited assets in your estate, it's also an opportunity to make sure beneficiary designations on your financial accounts and property titles are updated.

Learn more: Why naming beneficiaries is an essential part of estate planning

3. Get the right help

An inheritance can arrive in many forms, and different kinds of assets can mean different legal, tax and financial considerations, some of which may not be obvious right away, such as:

What are the short- and long-term tax implications?
What paperwork do you need to transfer the asset to your name?
What legal documentation will you need in place before receiving your inheritance?
Should the asset be kept separate by an inheriting spouse or comingled into a couple’s marital assets?

We can help evaluate your options and the impacts of your inheritance while also helping to coordinate with other professionals you may need, such as an estate attorney and tax professional.

Certain circumstances may require more specialized help to manage your inheritance. You may need the help of a qualified probate lawyer if the person died without a will, for instance, or if someone is challenging the will or contesting the estate.

Learn more: Getting started on estate planning: Key actions to take

4. Understand the tax implications

Different types of assets have different tax rules and implications. These rules can be complicated, and they could significantly impact your finances.

Here are common types of assets and their potential tax implications for an inheritance:

Inherited property, stocks or other investment assets: For tax purposes, you’ll need to know the “cost basis” of the stocks, property or other investment vehicles. For inherited assets, the cost basis is typically the fair market value of the asset on the date of the decedent’s death. This new value can significantly limit the capital gains tax you will owe when you sell the asset depending on the original purchase date.
Life insurance proceeds: The money you receive as part of a life insurance payout is not typically taxed. However, if you place the funds in an interest-bearing account, you will be taxed on any interest you earn.
IRAs: The tax rules on inherited IRAs can be complicated and depend on whether you inherit it from your spouse or someone else:

If you inherit an IRA from your spouse, you will have several options on what to do with the account. Depending on your chosen option, you may not have to take a required minimum distribution (RMD) from the account each year.
If the inherited IRA comes from someone other than a spouse, RMD rules will apply. For large inheritances, this can mean a significant tax liability during the years when you are required to take the minimum distribution. Talk to your financial advisor about strategies to help manage those inherited distributions as part of your overall financial plan.

Income in respect of a decedent (IRD): IRA distributions are the most common example of what’s called income in respect of a decedent (IRD), which is untaxed income that a decedent had earned during their lifetime. Other examples include uncollected wages, bonuses, vacation and sick pay. Any inherited IRD will be taxed as if the decedent is still living and you, as the beneficiary, will typically be responsible for paying taxes on the income.

Inheritance tax

The decedent’s estate is responsible for paying any state or federal estate taxes owed. However, if you live in Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania, your inherited assets may be subject to an inheritance tax. The amount of tax you pay is determined by the value of the assets you receive and your relationship to the benefactor.

5. Review your financial goals

Receiving an inheritance can be a good time to evaluate how you might use the new assets to help reach your financial goals or honor the legacy your loved one wanted to leave behind. Some possibilities include:

Paying down debts, particularly high-interest debt such as credit cards or student loans
Adding to your retirement savings
Managing income and estate taxes
Helping to pay for a family member’s (or your own) education
Helping loved ones financially
Setting up a trust or foundation
Contributing to a favorite charity

6. Update your estate plan and reevaluate your insurance needs

Added wealth can come with implications for your estate plan and insurance needs. Here are some things to consider when managing and protecting your assets after receiving an inheritance:

Do you need to increase your insurance? For example, if you’ve inherited expensive jewelry or artwork, you may need more property and casualty coverage. Or, in the event you’ve inherited a long-held family property, you may want more life insurance to help ensure future generations can afford to maintain it when you’re gone.
Was the person who passed away a beneficiary of your estate? If they were listed as your beneficiary, durable power of attorney, trustee, personal representative, or medical power of attorney, update these documents.
Does the inheritance affect your estate plan? If the inheritance is sizeable, you may want to review and update your estate plan to help manage the potential tax impact for you and your own beneficiaries. Even if it’s not sizeable, it’s a good time to check your beneficiaries and review your estate plan to ensure it still reflects your wishes.

Let us help you through the process

Whether your inheritance is big or small, expected or a surprise, we can guide you through the financial implications to help achieve your overall financial goals.