Receiving an inheritance can trigger impulsivity.
Heirs are fortunate for having received an inheritance.
Their loved ones were not obligated to leave them any money.
Rather, the gifting to the heirs was a choice.
Although much thought goes into preparing an estate plan and outlining estate distributions, many heirs act impulsively with their inheritances.
Whether heirs initially choose to invest, spend, or give away the money, these heirs may later regret their choices.
Taking time to understand the scope of the inheritance and process emotions around the recent loss can be helpful in making wise decisions.
Heirs should inventory the investments, cash, real estate, or other assets received.
Pausing impulsive spending for a few weeks or months can promote greater confidence and less regret over actions taken regarding the inheritance.
Many people question what to do with an inheritance.
Although the federal government does tax "estates," it does not tax "inheritances".
However, some states tax either "estates" or "inheritances" or both!
Yes, this can get complicated.
Even if your inheritance is not subject to an estate tax (whether federal or state) or an inheritance tax, inheriting certain assets can trigger taxes.
For example, absent limited exceptions, when a non-Roth IRA or 401(k) is inherited by a non-spouse, the funds must be completely drained from the account within a decade.
This schedule can generate taxable income and can lead to a shift that puts you into a higher tax bracket.
When inheriting assets like real estate or investments, you may benefit from a “step-up” in cost basis.
This means the capital gains taxes will be calculated based on the fair market value on the date the owner died.
Selling an asset when the capital gains taxes are minimal can be a wise financial move.
If you are not in a great financial position before an inheritance, strategic steps can help you set yourself up to achieve your goals.
Those with high-interest debts will benefit from paying them off using the funds.
After these debts have been paid, wise uses for the money can include creating an emergency fund, contributing to retirement accounts, or funding career advancement or education.
By working with an experienced estate planning attorney and financial advisor, you can make the inheritance work for your personal goals while minimizing risk.
When a commercial property or home is inherited, the new owners have several options.
They can choose to sell it, rent it, or keep it for themselves.
When heirs do not sell a home or property, they must take on the costs of taxes and maintenance.
Selling the property can trigger a capital gains tax payment.
When business property is inherited, the heirs should prioritize understanding their rights and responsibilities of ownership, as well as possible buyout offers.
Having a professional valuation can help heirs make an informed decision.
If multiple heirs are involved, they must decide together how the business asset will be sold or divided.
Inherited money should be approached thoughtfully.
Spending it quickly or investing it all in a single venture can have unpleasant consequences.
Working with an experienced estate planning attorney to understand your options and to account for the inheritance in your own estate planning will help you to maximize this gift.
Impulsivity is a problem when large sums of money are involved.
You can quickly squander a generous gift or make decisions with adverse tax consequences.
The best way to honor an inheritance is to use the assets to promote your financial health.
Receiving an inheritance is a significant life change.
Reviewing and updating your estate plan to account for the windfall will benefit you and your loved ones.
This post is for informational purposes only and does not provide legal advice. You should consult an attorney for advice on any specific issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.
Reference: Merrill Lynch “Q&A: How can I make the most of my inheritance?”
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