What to do when you inherit money

Derek Bostian, CFP® Derek Bostian, CFP®

Inheriting financial assets can be a bittersweet experience. Odds are that you’ve experienced the loss of a loved one or someone you were close with.

There might be a lot of confusion during this time. Here are the first three things we tell our clients to do with their inheritance.

Get help

Inheritances can leave you confused with what to do with the money.  There’s plenty of people that will give advice on how to invest or what to do with it. Ultimately, find someone you trust that knows the rules of what you’ve inherited and how it impacts your personal financial life.  The last thing you want is to miss a step and have the IRS charge you penalties or extra taxes.

Understand what you have

You’ll have choices to make with how to treat your inheritance that will likely have varying tax implications on your life.  You need to have a good understanding of what you’ve inherited, the options for the account, and how it impacts your financial plan.

If you currently have debt, for example, and need a way to reduce it there maybe strategies available that can reduce taxes owed.  This  could allow you to have additional cash flow to pay your debts down.

If you inherit a brokerage account or real estate, you’ll likely receive a stepped up cost basis of the asset.  This means that if someone bought stock for $10 and it’s now worth $20 when you inherit it, it’s like you bought the stock for $20.  The same can also be true for real estate.

Right now the ability to stretch an inherited retirement account is available – sometimes called a Stretch IRA.   One of the benefits of this type of account is to stretch it over your lifetime because it can help you keep the account in force longer and lower taxes.  This means taking withdrawals over your life expectancy.  The right investment plan can help you keep the money longer while also benefiting your family over generations.

Take a deep breath

You might be tempted to spend the money or share it with friends and family.  More importantly, take time to figure out your spending and tax plan.  Studies show within 2 years that 1 in 3 beneficiaries spend their inheritance¹.

An inheritance can be a gift to help you or your family get ahead.  With proper planning and advice, you could make your inheritance last for generations – if that’s your goal – or go have fun with it.  The right help can help you keep more of the gift, lower taxes, and maximize the benefit.

Inheritances can cause stress, anxiety, and extra expense if you don’t have the right plan. There are IRS requirements and steps to be followed to ensure proper administration and distribution of the money or property.  Seek help before you make quick decisions that might blow up your inheritance with extra taxes or penalties.  Informed decisions and investments can help you get the most out of your gift over the long haul.

Sources
  1. https://www.marketwatch.com/story/one-in-three-americans-who-get-an-inheritance-blow-it-2015-09-03
Derek Bostian, CFP®