Providing for heirs is often one of the primary goals of financial planning. Being able to leave an inheritance to loved ones can provide joy and peace of mind. To those receiving an inheritance, the gift should be considered a blessing. However, often it can seem overwhelming and stressful to receive an inheritance. Here are some steps you can take to head in the right direction and make the most of your inheritance. 

The first thing you should do is to take your time. When a loved one dies, you’re not thinking clearly enough to make any major financial decisions. Take time to grieve and know that there is no reason to rush. Avoid making any drastic moves right away, such as quitting your job or making a large purchase. Be patient and develop a plan that fits with your goals.

Once some time has elapsed and you are ready to take the next step, it is important to know what you are actually inheriting. Taxability and distribution options may differ depending on the type of asset and the way the asset is titled. Some assets must go through probate, while others can go straight to the beneficiary. Probate is the court-supervised process of authenticating a last will and testament if the deceased made one. It includes locating and determining the value of the person’s assets, paying their final bills and taxes, and distributing the remainder of the estate to the rightful beneficiaries.

Retirement accounts, such as an IRA, Roth IRA, or 401(k) often avoid probate because they generally have a named beneficiary. Depending on the type of retirement account and your relationship to the deceased, the distribution options and taxability will vary.  For this reason, it’s best to speak to a professional regarding your unique situation before making any decisions regarding an inherited retirement account.

Trust accounts that are funded while the deceased was living also typically avoid probate. A trust is a legal arrangement through which funds are held by a third party (the trustee) for the benefit of another party (the beneficiary). The creator of the trust is called a grantor. If you inherit assets through a trust, the trust document stipulates how these assets will be distributed. In some cases, the assets get distributed outright to you. In other instances, the trust stays intact, and you get distributions based off of the parameters described in the trust document.

Other common ways to inherit assets that avoid probate are life insurance policies, accounts that are joint tenants with rights of survivorship (JTWROS), or transfer on death (TOD) accounts. JTWROS accounts automatically go to the remaining accounts holder(s), while TOD accounts and life insurance proceeds go straight to the beneficiaries named on the account.

If you inherit an asset that must go through the probate process, the executor of the estate will be responsible for distributing assets to you based on instructions in the last will and testament. If the deceased person died intestacy (meaning without a will), state law will determine how assets will be distributed. 

After identifying the type of asset you are inheriting and what your options are, it’s time to develop a plan. If I can give you any advice, it’s to be intentional about how you use your inheritance. As you start thinking about what you want to do, it’s important to remember where it came from. Remember the hard work and sacrifice that went into making that inheritance possible! Keeping that in mind will bring a sense of responsibility and accountability to the situation and help you use your inheritance wisely. Here are a few ideas to help get you started:

Save

  • Create an emergency fund for those unexpected expenses that can pop up when you are least expecting them.
  • Save for big goals such as a home purchase, college education, or retirement.

Spend

  • Pay off high interest debt.
  • Enjoy a portion of your inheritance, but just be sure to keep the amount in check.

Give

  • Donate funds to charity in honor of your loved one. This may also provide some tax benefits.

Your inheritance has the potential to change the trajectory of your finances. For some, gaining sudden wealth could mean finally being able to buy a home, pay back student loans, save for retirement, or start a business. The key is to honor the person who left you the gift by staying disciplined to meeting your goals.

April 28, 2021
Inheriting Money

The Game of Life – Inheriting Money

Providing for heirs is often one of the primary goals of financial planning. Being able to leave an inheritance to loved ones can provide joy and […]
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