Receiving an inheritance: Three things to consider.


Receiving an inheritance brings a mix of emotions; with the loss of a loved one and receiving a portion of their life long hard work. With newly acquired assets come tasks and responsibilities. Adding an emotion component can make your financial decisions quite difficult.


There are three things to consider when receiving an inheritance.


How will it be taxed?


Not all inherited assets are created equal. Especially when considering taxation. Some assets may receive a step up in basis upon the passing of the grantor. Some will be tax free upon delivery. Inherited accounts may be taxed in full at your tax rate, while other accounts may be tax free, with tax free growth, but are required to follow certain distribution rules.

The rules for each asset is dependent on how the assets are delivered. Are the funds in a retirement account like a Roth IRA or Traditional IRA? These account types have rules related to when you are required to remove funds, and how those funds are taxed upon distribution. Assets not in retirement accounts, like real estate or stock holdings, will receive a step up. Life insurance settlements are the most straight forward, delivering tax free funds shortly upon notification of death.


If you receive a single type of inherited asset, determining tax consequences will be a straightforward process. However, it is much more likely that an estate will deliver multiple forms of assets with different rules. Navigating the rules requires diligent preparation and execution.


How will you use the funds?


The receipt of an inheritance (expected or unexpected) provides you with new resources to meet your goals and obligations. However, it is very likely that your financial standing was not the same as your benefactor.


It is important to review account investment positions or hard assets (e.g. real estate) and consider, ‘Do I want this?’. Making sure account portfolios are in-line with your investment objectives are a must. Considering whether to sell or hold on to assets like real estate will be necessary before market volatility drastically changes your financial position. And as state above, you must consider how your financial moves will affect your taxes.


How did your loved ones want you to use the funds?


Contradicting the last point; it is an emotionally sound exercise to consider how your loved ones wanted you to use the funds. Very often we simply want to provide our loved ones with a better life. But subconsciously, we all have a different idea of what that means.

It is a good mental exercise to consider what goal our loved ones had when they decided it was worth us having this wealth. Did they want us to use these funds for further education? Did they gift us the business to sell or to continue the legacy? Was this vintage car meant to be used or displayed?


More than just wealth, an inheritance is the last gift and memory a loved one gives us. With a proper plan you can make sure you put the most money into your own estate and use the funds in a way that would make your loved ones smile.

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