You’ve Inherited Money… Now What?
Deciding what to do with an inheritance you’ve received from a loved one who has passed away is an emotional process. Not only that, when you inherit money, no matter the amount, you’ll no doubt have questions about how to responsibly allocate that money. Your options will differ depending on the type of assets you inherit as well as where and how you plan to invest this money.
Here are 3 strategies to consider taking after receiving an inheritance…
1) Consider your financial goals
Before deciding what to do with your money, ensure the use of your inheritance aligns with your current and future goals. This means considering…
- Paying off college/credit card debt
- Setting up college savings plans for children
- Padding an emergency fund
- Reinvesting it – rebalancing your portfolio, diversifying your retirement plan, contributing the max to your retirement plan if you haven’t already, etc.
- Updating your estate plan/ leaving a legacy for others
- Considering charitable contributions
- Investing in home improvements
- Purchasing or altering a long-term care insurance plan
2) Factor in tax implications
- There are different types of inheritances that may be taxable, especially if you sell or earn income on an inherited asset. This means you may have to pay inheritance, estate, income, or capital gains taxes.
- If inheriting an IRA, 401(k), or other retirement plan, the SECURE Act has altered the distribution and RMD rules on these accounts. Because of this, you may be required to take the inheritance in 10 years if the account was owned by a Non-eligible Designated Beneficiary, or Non-EDB (Example: a parent or sibling leaves you an inheritance). If the inheritance is from an EDB (i.e. a spouse), you have more options such as deferring RMDs. There are many fine-print rules when inheriting a retirement account, so you’ll want to make sure you discuss how the SECURE Act may affect your inheritance tax with your advisor.
- If inheriting a home, the first thing you’ll want to do is have the home appraised in order to determine the value at death. Then, you’ll want to consider moving in, renting the property, or selling or co-owning the property within your family. If selling, the home may be eligible for a step-up in basis (“the adjustment in the cost basis of an inherited asset to its fair market value on the date of the decedent’s death”). If the property is eligible for a step-up in basis, it may minimize the amount of capital gains you pay on profits from selling the property. (Click here to learn more about step-up in basis.)
- A step-up in basis can also apply to inherited stocks and bonds. Again, if this strategy applies, the cost basis of the asset may be reset to the value upon inheritance. Then, if you sell the assets, you might only pay capital gains on any profits calculated from the time of inheritance.
3) Use your resources – Consult an advisor
- Take your time before making any big decisions and consult an advisor. However, you shouldn’t wait until the decisions become urgent, especially during tax time. For instance, if you inherited an IRA, you may not want to take a lump sum distribution off a pre-tax IRA because you’ll end up paying taxes on the full amount of the IRA that you took out for that year. As mentioned, big financial decisions can accrue hefty tax penalties if you’re not careful, which means that…
- You should make sure your financial advisor is also a tax accountant. An advisor who specializes in tax can help you navigate situations like monitoring tax law changes, considering income changes and other milestones that will affect your finances, potentially reinvesting money into a brokerage account, and conducting an analysis to see if you should accelerate distributions. Or an advisor can help you factor tax savings into your plan for what to do with an inherited home, stock, or bond and consider whether these assets qualify for that aforementioned step-up in basis. When it comes to inheritances, an advisor must be able to speak on the tax consequences, as the two so often intersect.
Because no inheritance is the same, the advice for what you should do with it will not be the same either. Our registered financial advisors are well-versed in tax knowledge and portfolio management and can walk you through your options. At Storen Financial, we present the full picture when navigating the details of your inheritance, always emphasizing what steps will be the most beneficial for you as well as implementing a customized tax-saving strategy that fits your unique situation. Ultimately, our goal is to set you and your loved ones up for success.
Have questions? Or interested in a consultation? Click here to contact us now. Or click here to learn more about our Financial Planning and Investment services.
Want to learn more?
Here are more resources to help answer your questions…
Q&A: How can I make the most of my inheritance? – Merrill: A Bank of America Company
How to Manage an Inheritance: Tips for Handling Inherited Wealth – Ameriprise Financial
What’s the best thing to do with inherited money? – Darrow Wealth Management
7 Options To Manage Your Inheritance Money – Titan
Blog by Ronnie Jackson, CFA® – Financial Advisor
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Storen Financial and LPL Financial do not provide legal advice or services. Please consult your legal advisor regarding your specific situation.