Receiving an inheritance is often intertwined with the heavy emotional weight of losing someone you deeply care about. It can be extremely difficult to think clearly about what needs to be done. It may feel overwhelming to make financial decisions on top of other responsibilities and emotions to process.
An inheritance can be a transformative financial event, however – it’s a gift that can greatly benefit you and your family, and the choices you make can significantly impact and shape your financial future.
6 Steps to Take When You Feel Overwhelmed
When you receive an inheritance, some helpful steps to follow are:
- Take your time.
- Assess what you’ve inherited.
- Understand the tax implications.
- Evaluate your financial goals.
- Think about your estate plan.
- Consider the help of a professional.
With careful consideration and strategic planning, you can be prepared to take on the complexities of managing an inheritance and create your own legacy.
1. Take Your Time
The most important thing to remember when you receive an inheritance is to take a breath and take your time before making any major decisions. It’s a time for grieving, and there is no need to rush into any financial planning. The money can wait – take care of yourself first.
When you’re ready, you can start thinking about what you’d like to do with the money and assets you’ve inherited, what your options are, and the impact the windfall will have on your finances.
While you’re processing your loss, you can put any inherited cash in a savings account, money market account, or short-term Certificate of Deposit (CD) to keep it safe and liquid.
2. Assess What You’ve Inherited
An inheritance can involve many different types of assets, and you should carefully examine each one. Inheritances often consist of cash, investments, retirement accounts, life insurance, real estate, and personal property. Each asset class has its own unique considerations, so it’s important to have a clear understanding of what your inheritance involves.
Investments like stocks, bonds, mutual funds, or other investment types, may benefit from an accurate market analysis to assess their value. A financial advisor can help with this valuation and the assessment of any other financial assets, and with determining when they’ll be available to you.
Real estate property and other personal property (such as artwork or jewelry) may need to be appraised by professionals to determine their current market value.
3. Understand the Tax Implications
Navigating the tax landscape when you receive an inheritance can be a complicated process. Depending on the assets you’ve inherited, it’s important to understand your potential tax implications at both federal and state levels.
- Investment assets: The cost basis of investments for tax purposes is typically based on the fair market value of the investment on the date of the decedent’s passing, not the original cost when the investment was purchased. Known as a step-up in basis, it can affect the amount of capital gains paid when you sell the investment assets.
- Inherited Individual Retirement Accounts (IRAs): Depending on the type of IRA (traditional or Roth) and if the IRA is inherited from your spouse or another, the tax implications will vary and can be complicated. You may need to take required mandatory distributions (RMDs), and your distributions may be subject to taxes. You may also be subject to a tax penalty if you don’t follow the RMD requirements.
- Life insurance: Life insurance proceeds aren’t generally taxed. However, if you place these funds (or any other inheritance assets) in an interest-bearing account, you’ll pay taxes on the interest earned. If you have a large amount in this type of account, the taxes can be considerable and may require you to make estimated tax payments.
Taxes can have a significant impact on your inheritance. It’s essential to stay informed on tax law and ever-changing tax regulations to help you remain in compliance and potentially minimize your tax liabilities.
4. Evaluate Your Financial Goals
Receiving an inheritance can unexpectedly shift your financial journey, and may change your timeline or objectives. Having a comprehensive financial plan in place that includes the wealth you’ve inherited can help you stay on track to reach your goals.
What are your short-term and long-term financial goals? They may include a range of different objectives:
- Pay off your mortgage or other debt.
- Boost higher education funds for your children.
- Contribute to and diversify your investments and retirement savings.
- Enhance your life insurance, long-term care insurance, and other protection options.
- Invest in home improvement projects or real estate.
- Give to charitable organizations that are meaningful to you.
- Leave a legacy for your children and grandchildren.
A thoughtfully developed financial plan can help you manage, preserve, and grow your wealth. Careful planning can help you accomplish your financial objectives now and in the future.
5. Think about Your Estate Plan
It’s natural to think about your own estate plan when you receive an inheritance. Your inheritance may necessitate reviewing and updating your will and estate plan to reflect your new circumstances and intentions. Make sure your designated beneficiaries are also aligned with your wishes.
What legacy and values do you want to pass on to your heirs? An inheritance can present opportunities to enrich the lives of your loved ones as well as others. Consider establishing trusts, endowments, or charitable giving vehicles to pass on your wealth in a structured and meaningful way.
6. Consider the Help of a Professional
What you do when you inherit money can shape not just your own financial future, but the legacy that you hope to pass down through generations as well.
There can be legal, tax, and financial implications associated with an inheritance that requires a deeper understanding of a professional. Working with an expert can help you navigate the complexities of all the decisions you need to make. A financial advisor can provide valuable insights and help with financial planning and tax strategies to manage your inheritance.
At Legacy Planning, we can help you with the difficult decisions surrounding an inheritance. We’ll help you sort through the different assets in your inheritance and strategize with you how to move forward. We’ll work with you, at your own pace, to develop a financial plan and estate plan that meets your needs and objectives, and help you build a legacy of purpose and prosperity for generations to come. Click here to schedule a conversation with us today.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.
