By Bryan Trugman, CFPⓇ
Receiving an inheritance can bring up an entire range of emotions, from surprise and overwhelm to hope and sadness. While your newfound windfall of money may positively impact your financial situation, it can also serve as a poignant reminder of your loss.
Wisely managing the money or assets you inherit can be a meaningful tribute to your departed loved one, yet navigating this process can come with its challenges. When you’re grieving, it’s common to miss important details, even if you have good intentions.
Making decisions about what to do with an inheritance can be more complicated than it seems at first, which is why speaking with a reliable financial advisor can help you understand the process and make the right choices. If you’ve inherited assets or expect to, here are some important things to keep in mind.
Take a Moment
Before making any decisions about the money, you need to process the loss of your loved one. Failing to deal with your grief can result in emotional spending that compromises the money you’ve just received. If you give yourself some time, you may become more sensitive to your loved one’s wishes or have the chance to clear your head of complex emotions.
If your loved one spent their life building and preserving their wealth, they probably hoped you’d do the same. Letting your inheritance sit for a minute can help you overcome the initial temptation to splurge on something like a fancy vacation or an expensive new home. If it’s important to you to honor their legacy, don’t forget to take care of your own emotions to protect the wealth they’ve gifted to you.
Understand the Type of Inheritance You’ve Received
Common types of inheritances include:
- A non-retirement brokerage account, trust account, or cash
- A retirement account such as an IRA, Roth IRA, or 401(k)
- A house or other property
Knowing and understanding the types of inheritance you’ve received impacts how you access the funds, any taxes associated with it, and what your options are moving forward.
For example, if you inherit a home but don’t want to live in it, you may need to learn more about potential capital gains taxes before deciding to sell the property. If you find that a capital gains tax would be too costly, you might explore another option, such as renting out the house or living in it temporarily as you assess your situation.
It’s crucial to understand the concept of cost basis, particularly for taxable assets like stocks and mutual funds. Upon inheritance, the cost basis for these assets is ‘stepped up’ to match their value on the day of the original owner’s passing. Let’s illustrate this with an example: Suppose your grandfather acquired a share of stock for $45, but at the time of his death, its value had surged to $245. In this scenario, your basis for the stock would stand at $245. Consequently, if you decide to sell the stock immediately, you won’t incur any tax obligations. Alternatively, if you choose to retain the stock, taxes would only apply to the difference between the eventual sale price and the adjusted basis of $245. Because of this favorable tax treatment, a taxable-account inheritance could be a good source of cash for a short-term goal, such as paying off high-interest debt.
Inheriting a retirement account also comes with its own set of considerations, particularly if you inherit the retirement account from a non-spouse. When inheriting retirement accounts you may be required to take annual distributions or fully distribute funds from the account within a certain time period or a combination of both. Regardless of the inheritance you receive, it’s best to contact a tax-planning or financial professional who understands the intricacies of inheritance situations.
Take Stock of Your Financial Situation
Once you understand the type of inheritance you’ve received, you’re better equipped to align your plans for the inheritance with your other financial goals, such as:
- Contributing to your retirement account
- Paying down your mortgage
- Saving for your children’s college education
- Giving to a charity or foundation you care about
- Buying a vacation home or taking your family on vacation
William Bird, a partner at Murtha & Bird, P.C., says the following:
“It’s common for clients to compartmentalize estate planning and financial planning. But financial plans and estate plans are closely interconnected.
“In the case of an inheritance, with the current federal estate and gift tax exemptions of $13.61 million set to sunset in 2025, a financial advisor can work with an estate planning attorney to identify strategies to lock in those high exemptions through lifetime gifting before any tax law changes come down.
“An attorney and financial advisor must work hand in hand. A financial advisor will collaborate and coordinate with an attorney to protect the clients’ assets, and an attorney will collaborate and coordinate with the financial advisor to make sure the estate plan comes to fruition. Without financial assets (which the financial advisors help to grow), a client can’t fund the estate planning strategy such as an irrevocable or revocable trust.
“When the financial advisor and attorney work together, they can work toward getting a more complete picture and providing the client with holistic advice.”
Take the Next Step
When dealing with significant financial decisions like managing an inheritance, seeking professional guidance is key to success. A reliable financial advisor offers seasoned and unbiased advice, guarding against potential mismanagement of your windfall so your portfolio is optimized for long-term financial growth.
At Attitude Financial Advisors, our goal is to provide our clients with clarity and confidence in their financial journey. By customizing our services to fit your unique circumstances and goals, we strive to make navigating complex financial decisions like these more manageable. If you’re seeking a trustworthy partner who prioritizes your best interests, contact me via email at btrugman@attitudefinancial.com or give me a call at (516) 762-7603 to set up a free consultation.
About Bryan
Bryan Trugman is a managing partner, co-founder, and a CERTIFIED FINANCIAL PLANNER™ practitioner at Attitude Financial Advisors. With more than 16 years of experience, Bryan specializes in addressing the financial needs of new parents as they seek to realign their finances, assisting divorced individuals as they navigate an unforeseen fork in the road, and strategizing with those seeking to accrue a dependable retirement nest egg. Bryan is known for being a good listener and building strong relationships with his clients so he can help them develop a customized financial plan based on what’s important to them. He is passionate about helping his clients experience financial confidence so they can worry less and play more. Bryan has a bachelor’s degree in industrial and systems engineering with a minor in mathematics from State University of New York at Binghamton. He has served on the board of the Financial Planning Association and continues to be actively involved in the national organization. He is also a member of the Plainview-Old Bethpage Chamber of Commerce and has served as its vice president and as a board member. When he’s not working, you can find Bryan on the ballroom dance floor or engaged in a fast-paced game of doubles on the tennis court. To learn more about Bryan, connect with him on LinkedIn. Or, watch his latest webinar on: How Much Is Enough? A Surprisingly Simple Way to Calculate Your Retirement Savings Needs.
About William
William has been with Murtha & Bird, P.C. since 1994 when he started as a student intern. His practice primarily focuses on trust and estate law, concentrating in trust and estate litigation and estate and trust administration. He represents clients in New York State Surrogate’s Court in probate contests, contested accounting proceedings, discovery proceedings, and other miscellaneous proceedings, and in actions and proceedings in Supreme Court relating to trusts and estates. His practice also includes the preparation of wills and trusts and other estate planning and elder care planning documents. William is also an adjunct professor at Touro College, Jacob D. Fuchsberg Law Center, where he supervises the Not For Profit and Small Business Clinic. To learn more about William, connect with him on LinkedIn.
