Of all the financial strategies that many people have in place, an inheritance strategy is usually not one. Discussing estate planning among family members can be uncomfortable even with the best relationships, let alone discussing the contents of an estate plan and what you may inherit after your loved one is gone.
However, having a plan in place can save you headaches down the line. Losing a loved one is difficult emotionally and logistically but understanding what to expect and having a plan for your inheritance can make the process easier.
Inheritance With a Will
Having a will in place helps designate beneficiaries and determine who receives what. While a will may not eliminate the need for probate, it can provide clear instructions for settling an estate and help ensure your wishes are followed. Knowing whether you are a designated beneficiary—and having an idea of what that inheritance may look like—can also help you prepare for receiving cash or other assets. ¹
When No Will Exists
Not having a will can make receiving an inheritance more complicated. Sorting out an estate can involve legal fees, probate, and potential disagreements among family members and other heirs. If you’re not sure exactly what the estate entails, it could take months or years to track everything down. Then there’s the personal cost. Even if everyone agrees on how the estate should be settled, the process can take a financial, mental, and emotional toll.2
If there are multiple types of assets to divide, settling an estate without a will can become even more complicated. Life insurance, real estate, and retirement accounts may be subject to different rules regarding ownership, beneficiary designations, and taxation. Spouses may also receive different tax treatment than other beneficiaries, while adult children and other relatives may not receive the same benefits. ²,³
Creating an inheritance strategy also gives you an opportunity to help ensure your loved one’s estate is in order. You don’t want to wait until your loved one is gone to discover, for example, that an ex-spouse is still listed as a beneficiary on a life insurance policy.
The Pitfalls of Inheritance
While many of us dream of a lump sum of cash falling into our laps, the reality of inheritance can be a little less rosy. Although many inheritances are not considered taxable income to the recipient, certain income received as part of an inheritance may be taxable. For example, royalties or certain payments earned by the deceased may be treated as taxable income to the beneficiary. ⁴ Inheriting real estate means that you now have a property that requires maintenance and upkeep as long as you hold onto it. While it used to be possible in certain circumstances to “stretch” an inherited IRA over a beneficiary’s lifetime, the SECURE Act changed the rules for many non-spouse beneficiaries, who may now be required to withdraw the inherited funds within 10 years. ⁵
Don’t Quit Your Day Job
Just because you’ve received a large inheritance doesn’t mean it’s time to quit your day job and retire to a life of luxury on a tropical island. Having a plan can make it easier to stay on track before the temptation to spend sets in.
Even in the best circumstances, dealing with an inheritance can be complicated. Whether you’re expecting a large inheritance or a more modest amount, taking the time to develop a plan can help you make thoughtful decisions about your newfound assets. Avoid making significant financial decisions or dramatically changing your spending habits simply because you have more money available.
An inheritance can be an important part of your overall financial picture, and having a plan for those assets can help you make the most of them. If you have questions about how an inheritance may fit into your financial plan, contact your Patriot advisor. We’re happy to help you navigate the process and determine the best way to incorporate your inherited assets into your long-term goals.
- https://smartasset.com/investing/how-does-inheritance-work
- https://www.kiplinger.com/article/investing/t064-c000-s002-smart-ways-to-handle-an-inheritance.html
- https://www.hrblock.com/tax-center/income/other-income/is-your-inheritance-considered-taxable-income/
- https://www.marketwatch.com/story/inheritance-estate-planning-and-charitable-giving-4-strategies-to-reduce-taxes-now-11645140214
- https://www.forbes.com/sites/davidrae/2022/02/22/how-to-minimize-taxes-when-you-inherit-an-ira/
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.