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.
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.
Investment advisory and financial planning services offered through Advisory Alpha, LLC, a Registered Investment Advisor. Insurance, Consulting, and Education services offered through Two Waters Wealth Management, LLC. Two Waters Wealth Management is a separate and unaffiliated entity from Advisory Alpha. While tax and legal issues may be discussed in the general course of financial and investment planning Advisory Alpha does not provide tax or legal advice. Please consult with your tax or legal professional prior to making decisions relative to these issues.
Members of the Investment Team work directly with our firm and personnel but are licensed with Advisory Alpha LLC, a SEC Registered Investment Advisor. The Investment Team is not necessarily involved with the research, due diligence, and portfolio management functions related to all investment products or solutions used for each client. CFA® is a trademark owned by the CFA Institute. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and federally registered CFP (with flame design) in the U.S. which it awards to individuals who successfully complete CFP board’s initial and ongoing certification requirements