Receiving an inheritance often comes during an emotional and overwhelming time, especially when many moving parts are involved. If this is you, take a breath. Nothing needs to happen right away.
Below are some key steps to take when you're preparing for, or have just received, an inheritance.
1. Understand the Process May Take Time
The timeline for receiving your inheritance depends on the type of asset and the estate plan in place.
- If there is a will: The estate goes through probate court, which can take several weeks to years depending on complexity and whether the will is challenged.
- If there is no will: Probate court must determine the decedent's intentions, which can take months to years.
- If there is a trust: Assets typically transfer more quickly, as trusts avoid probate.
- If you are a named beneficiary: Beneficiary designations supersede the will, allowing for faster distribution.
2. Take a Breather Before Making Decisions
Avoid rushing into decisions before fully understanding what you’ve inherited.
Make sure you know:
- The estimated value of the assets
- The type of assets
- Any tax ramifications
- The distribution schedule
3. Seek Assistance From the Right Professionals
Because inheritances can be complex—legally, financially, and emotionally—lean on your professional team. They can help you navigate:
- Tax implications now and in the future
- Estate settlement paperwork
- Legal documents required for asset transfer
- Optimal strategies for using the inheritance based on your goals
Building a strategic plan can help bring clarity and more peace of mind during an already challenging period.
4. Understand the Tax Implications
Different assets come with different tax considerations:
- Inherited property, stocks, or investments: These typically receive a “step-up” in basis to the fair market value at the decedent’s death, which can significantly reduce potential capital gains taxes.
- Life insurance proceeds: Generally income-tax-free.
- Inherited IRAs or 401(k)s: Rules vary depending on whether the account came from a spouse or non-spouse.
- From a spouse: You can roll the balance into your own IRA and delay distributions until your RMD age.
- From a non-spouse: You must take required minimum distributions, which may create significant tax liability—making tax planning strategies essential.
5. Revisit Your Financial Goals
Think about how the inheritance can support your long-term plan. You may consider:
- Increasing retirement savings
- Paying down debt
- Managing or reducing income taxes
- Supporting charitable goals
- Helping family with education costs
- Providing financial support to loved ones
- Enjoying personal passions or lifestyle priorities
6. Review Your Own Estate Plan
An inheritance is an ideal time to revisit your estate planning documents.
Evaluate questions such as:
- Are you adequately insured?
- Are your own loved ones protected?
- Did the decedent previously serve as a beneficiary in your estate plan?
- Does the inheritance change your estate tax exposure?
- Are your documents up to date, ensuring a smoother process for your heirs?
Receiving an inheritance is both meaningful and emotional. Don’t rush, give yourself the space to understand your options. We can help you clarify how the inheritance affects your goals, the tax implications involved, and how to integrate it into your broader financial plan.
Together, we can work to keep you on-track toward your financial goals.
Request a consultation to learn more.
Read more articles by Ryan Johnson