What To Do With an Inheritance
Losing a parent or a dearly loved one is among the most overwhelming and emotional experiences of a lifetime. Adding a large inheritance to what is already a difficult moment to navigate, can become paralyzing. Many women make an expected inheritance a big part of their own retirement/savings strategy. Others don’t expect anything, so an inheritance becomes a windfall that requires an unplanned-for amount of attention.
Either way, an inheritance presents an opportunity that should not be squandered. Upon receiving an inheritance, it is easy to choose to change your immediate lifestyle…take a vacation…buy a Birkin. You know, dear reader, that it’s my philosophy that you can have it all…just not all at once. With that, I encourage you to be thoughtful with your newfound wealth.
Here are a list of steps that I believe will help you make the most of your new fortune – be it big or small.
Update your own financial plan
Perhaps this inheritance means that the amount of money that you’ve planned to live on in your retirement will increase. Or maybe it means that you can afford to buy the larger home that you’ve been hoping for. No matter what, your lifestyle will be affected, so it’s an important time to sit down with your financial planner and discuss what could be. This way, you can design the next steps that will serve your goals.
Moreover, when the dust settles, do make sure you update your own estate planning documents with the help of your estate planning lawyer. Wills, trusts, and powers of attorney are all at their most helpful when they are current.
Be savvy with retirement accounts
Retirement accounts deserve special attention. If you received an inheritance in the form of a retirement account from someone to whom you were not married, you have three choices:
1.Retitle the account into an inherited IRA. In doing this, you will need to take a minimum distribution, based on your age, each year. The remaining account balance stays invested and has the potential to grow tax deferred. This option allows you to enjoy some of the money now while keeping the bulk of it to help you in your retirement years. Each amount withdrawn will be subject to income tax.
2.You could…decide not to decide. For now. You have five years to defer your decision. But at the end of those five years, you will have to cash out the entire lump sum and pay full income tax on the amount. A withdrawal can take place at any time within the 5 years following the death. Income taxes will be in effect in the year of the withdrawal. But, remember…inaction is an action in and of itself.
3.Finally, you can decide that you want to cash out right now – but you will have to pay full income tax on the whole amount of the account.
Beware of capital gains tax
Should you inherit assets that are not retirement accounts – such as investment accounts, real estate, collectibles, etc. – record the value on the date of death. Investments are easy to obtain a statement for, but for real estate and collectibles, you may need an appraisal. This amount will become your cost basis. This cost basis will dictate the amount of capital gains tax that you pay.
For example, if the portfolio you inherit is worth 100K on the date of death and 110K when you sell the investment, you will pay capital gains tax on the 10K that your investment has earned.
If you inherit a sizable estate, then the most important first step is to consult with an estate attorney, tax professional, and financial advisor. There may be an inheritance tax, and in the event you have to deal with inheritance taxes, you are going to want to get it right the first time.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.