Often times, receiving an inheritance comes at an emotional time and can be overwhelming when there are many different moving parts. You’re not alone if this is you. Take a breather, and don’t rush into any decisions. Nothing needs to happen right away. In this article, I’ll discuss steps to take when preparing for or recently receiving an inheritance.
1) Understand the process may take time:
- The rate at which you receive your inheritance will depend on the type of asset and estate plan in place by the person who passed.
- If there is a will: The estate of the decedent will go through probate court. This can last anywhere from several weeks to years, depending on complexity and if the will is challenged.
- If there is no will: A probable court will try to determine the decedent’s wishes. This can be a long and complicated process, taking anywhere from months to even years.
- If there is a trust: The trustee will manage the distribution of assets based on the trust provisions. Trusts avoid probate so the assets will typically transfer quickly.
- If you are a beneficiary: Beneficiary designations supersede the will. Assets transfer quickly.
2) Take a breather:
- Do not rush into making any decisions before fully understanding what you’ve inherited.
- You’ll want to know the estimated value of the assets, the type, the tax ramifications, and distribution schedule.
3) Get assistance from the right sources:
- As discussed, receiving an inheritance can come at an emotionally draining time and can be overwhelming. It can come in many different forms with different legal, tax, and financial considerations such as:
i. Tax implications now and in the future.
ii. Paperwork needed to settle the estate.
iii. Legal documents needed to settle assets out.
iv. How to best utilize the inheritance given your specific needs.
- You’ll want to discuss and evaluate your options with your professionals. Understanding your options and developing a plan moving forward can help provide piece of mind and comfort when working through this emotional time.
4) Understand the tax implications:
- The tax implications of different types of assets can significantly impact your finances.
- Here are the tax implications of common asset types:
i.Inherited property, stocks, or other investment assets: For inherited assets, you get a “step-up” in basis. The cost basis is typically the fair market value of the asset on the date of the decedent’s death. This can significantly help from a tax standpoint.
ii. Life insurance: This proceeds from life insurance are typically tax-free.
iii. IRAs/401(k)s: The tax implications differ based on whether you inherited it from a spouse or non-spouse.
*If you inherit an IRA from your spouse, you can roll this balance into your IRA and defer distributions until your required minimum distributions (RMDs) begin.
*If you inherit an IRA from a non-spouse, you will be subject to RMDs. For large balances, this can result in significant tax liability. You’ll need to consider strategies to manage/mitigate these distributions such as offsetting the tax with the use of other tax favored vehicles.
5) Review your financial goals:
- Evaluate how you might use the inheritance to help you reach your goals and how this might change your plan moving forward. Examples may include:
i. Adding to retirement savings.
ii. Paying down debts.
iii. Managing income taxes.
iv. Charitable passions.
v. Helping family with education expenses.
vi. Helping loves ones financially.
vii. Personal pleasure or utilizing assets on things that are important to you.
6) Review your estate plan:
- Receiving an inheritance is a good time to review your estate plan and evaluate if changes are needed.
i. Are you properly covered from an insurance standpoint?
ii. Are your loved ones covered in the case of your passing?
iii. Was the decedent a beneficiary of your estate? Are updates needed on that?
iv. Does the inheritance affect your estate plan? Will there be tax ramifications in the future?
v. Are proper estate documents in place to alleviate difficulty for others in the case of your passing?
These are the steps to take when receiving an inheritance. Again, don’t rush when working through the process. Take some time and make sure you understand your options. We can help you evaluate how the inheritance affects your needs, how it can support your financial goals, and discuss potential tax implications involved.
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