Receiving an inheritance, expected or not, can be life-changing. We’ve all read articles about people who lived frugally and never hinted at their savings, then left a fortune to heirs or a beloved pet. In reality, few families receive any inheritance, and most of those are less than $50,000. However, learning how to protect your inheritance is essential says Beck, Lenox & Stolzer Estate Planning and Elder Law, LLC. This article from Kiplinger is a good read, “Manage an Inheritance Like a Pro in Just Seven Steps.”
Before making any decisions, be sure to understand what you are inheriting. Most estate plans include a variety of assets, from real estate, investments, cash, retirement savings plans, life insurance proceeds and personal property.
Be patient. Estates don’t settle quickly. The executor will need to gather up all of the assets, and some may take longer than others to track down. Without a will, this process would be further complicated by court involvement and probate.
The inheritance rules differ depending on the asset, the state of residence, and the relationship. Spouses enjoy certain tax breaks that are unavailable to adult children or heirs. Some states impose an inheritance tax on family members based on kinship.
Depending upon the assets and your relationship with the deceased, you may or may not have to pay taxes. Unless your benefactor was ultra-high net worth, it’s not likely you’ll need to pay a federal estate tax. However, there are state estate taxes, depending on where you live, to be aware of.
Certain investments are taxable. Inherited stocks, mutual funds, or investments in a taxable account may enjoy a step-up in basis. The cost basis for these taxable assets, including stocks and mutual funds, is “stepped up” to the investment’s value on the day of the original owner’s death.
This tax treatment may make a taxable-account inheritance suitable for a short-term goal, like paying off high-interest debt or making a downpayment on a home. Protecting your inheritance might include keeping the money invested, but make sure to review your entire portfolio to see how it impacts your investment strategy.
Tax-deferred retirement accounts can be complicated when inherited. Spouses may roll assets into their own IRAs and postpone distributions and associated taxes until they’re 73. However, an inherited IRA to most people will need to be emptied within ten years of the original owner’s death, with Required Minimum Distributions. Your estate planning attorney can help you map out the withdrawals.
If you inherit a home, the property’s value is stepped up to its value on the date of the owner’s death. Let’s say you inherit a property purchased for $150,000 but is now valued at $300,000. The basis is now $300,000. Selling an inherited home gets complicated, so rely on your estate planning attorney to work through the tax details.
Life insurance proceeds aren’t usually taxable as income. However, the money might be included in your estate to determine the value for federal or state estate taxes. If a death benefit is paid out in a lump sum instead of installments, the interest on the death benefit is taxable.
What about spending your inheritance? Once you’re sure you have the money to pay any taxes, enjoying the benefit of an inheritance makes good sense. For some, this is an opportunity to pay off student loans, lower or eliminate credit card debt and set some aside for retirement.
Most people overestimate how long their windfall will last and underestimate how quickly wealth can evaporate. To protect your inheritance, deposit the money in a secure account and don’t quit your day job. If you don’t have an estate plan, you’ll need one to protect your heirs. Make an appointment with an estate planning attorney now to guide you and prepare for the future when you might be the benefactor.
If you are in need of an estate planning attorney, Jayson Lenox and Caroline Daiker Stolzer are available here at Beck, Lenox & Stolzer to help you. They offer a complimentary consultation, initially by phone, followed by an in-depth consultation in our office if warranted. Schedule that initial phone consultation by clicking here.
Reference: Kiplinger (Jan. 24, 2025) “Manage an Inheritance Like a Pro in Just Seven Steps”
