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You will likely be faced with a handful of transformational decisions in life – decisions that the current you will try to make about a future you. Marrying, having children, joining the military or switching careers, for example. What to do with an inheritance may also be a transformation decision with which you are faced. While an inheritance can give you unimagined opportunities and financial security, too often the opportunity is lessened by moves made without an understanding of the financial, tax or legal consequences. If you are fortunate to receive an inheritance, follow these tips to help the current you help the future you.
Understand the Timing. Know that it will take some time before you personally benefit from an inheritance and the timing will vary depending on how and what you inherited. If your loved one named you as an heir under a will or didn’t have a will in place, the courts will supervise the distribution of wealth in the process known as probate. As you might imagine, a court-driven process will take time. If you’re inheriting under a trust, a trustee (not the courts), will administer the trust, which will take less time. In either event, it will likely be at least six months before you personally benefit from certain assets passed by will or trust. Other inherited funds such as life insurance policies, annuity contracts and retirement accounts may be received earlier, as they pass by beneficiary designation, typically outside of probate or trust.
Seek Help. While some states impose a state inheritance tax, there is no federal inheritance tax, nor do you need to report your inheritance as income. However, subsequent decisions you make may have tax and legal implications that can be significant. Common inheritor missteps include selling property without an understanding of the legal ramifications to a co-inheritor, mistakenly changing character of an inheritance from separate property to community or marital property and triggering income tax by selling, retitling or distributing certain account types. To avoid unintended or expensive situations that most often cannot be undone, seek guidance from your CPA and estate attorney before transacting on any inherited funds.
Maximize It. You will need to define your “new normal.” Thoughts of upgrading your lifestyle may creep in… bigger home, fancier cars, early retirement, perhaps. Before you make large allocations of your inheritance toward new purchases, work with your financial advisor to help define the new lifestyle that you can afford and to help you prioritize your goals.
Think Beyond. Beyond how to spend or save, other considerations need to be made with an inheritance. You may need to revise or create your own estate plan to account for the additional funds and your new priorities. You may also see a change in insurance needs with the extra resources and increased net worth. Discuss other implications that your inheritance has on your life with your financial advisor and/or estate attorney.