How to Wisely Handle Inherited Money
Have you just received inherited money and are unsure what to do next? This guide will walk you through everything you need to know, from understanding tax implications and legal requirements to immediate actions and smart investment strategies.
Key Takeaways
Understanding the specifics of your inheritance, including tax implications and asset types, is vital for making informed financial decisions.
Prioritize paying off high-interest debts and building an emergency fund before considering investments with your inherited money.
Regularly update your estate plan and communicate with financial professionals to ensure your inherited assets are managed effectively and align with your long-term goals.
Understanding Inherited Money
Inheritance is the transfer of assets from a deceased person to their beneficiaries. These assets can come from various sources such as bank accounts, retirement accounts, and life insurance policies. Some assets, like retirement and life insurance accounts, transfer directly to the named beneficiaries without needing to go through probate. Inheritances can also include these types of assets.
When an inheritance occurs, the distribution of these assets is typically dictated by the will or trust of the deceased. Knowing the specifics of what you’ve inherited is crucial for making sound financial decisions. Whether it’s a lump sum of cash or a portfolio of investments, each type of asset requires a different approach for optimal management.
Tax Implications of Inherited Money
Taxes are an inevitable part of inheriting money. In the United States:
There are no federal inheritance tax.
Some states impose inheritance taxes and estate taxes on inherited assets.
The federal estate tax exemption is $13.99 million in 2025.
States like Oregon have a much lower exemption, at $1 million.
Knowing the specific situation tax rules in your state helps in avoiding unexpected liabilities.
Different types of inherited assets have varying tax implications:
Pre-tax retirement accounts are subject to federal ordinary income tax on any withdrawals and must be emptied within ten years.
Selling inherited assets within one year subjects the gains to short-term capital gains taxes.
Holding inherited assets for over a year qualifies for long-term capital gains tax rates.
The cost basis for these assets is generally stepped up to their fair market value at the time of death, which can significantly impact your tax liability. Additionally, an inherited IRA has specific rules that must be followed.
Consulting with a tax professional can help navigate these complexities and provide tailored guidance. They can assist with understanding required tax forms like Schedule D and Form 8949 for reporting capital gains, and advise on strategies such as donating appreciated assets to avoid capital gains taxes while receiving a fair-market value deduction.
Legal Considerations for Inherited Assets
Inheriting property often requires navigating the probate process to ensure proper asset distribution following the owner’s death. If the deceased owned property outright, a legal process may be required for legal transfer. This can be a complex procedure, and seeking legal advice is crucial to ensure all requirements are met.
State intestacy laws come into play if the decedent did not leave a will, dictating how the estate is distributed. Effective communication and thorough estate planning can help mitigate potential disputes among heirs regarding estates.
Reviewing and updating your estate plan after receiving an inheritance is essential to protect your newly acquired assets. This might include creating or updating wills and trusts, as well as reviewing life insurance and retirement plans.
Working with financial planners, estate attorneys, accountants, and a tax advisor can help navigate these legal complexities effectively. They can assist in ensuring that all your inherited assets are managed in compliance with legal requirements, thus securing your financial future.
Immediate Steps to Take with Inherited Money
Upon receiving an inheritance, it’s beneficial to take a moment to pause and reflect. This pause allows you to think through important financial decisions without making hasty choices. Start by assessing your current financial situation to gain clarity on where you stand. Please provide:
A list of all your income sources
Your debts
Your expenses
Other financial obligations
This comprehensive review will offer a clear picture of your financial situation and help you determine your priorities.
Managing inherited money involves complex paperwork and significant financial decisions. Review your financial picture and priorities before acting on your inheritance. This will ensure that your decisions align with your long-term financial goals and provide a solid foundation for future investments.
Paying Off High Interest Debts
Before considering any investments, it’s wise to prioritize paying off high-interest debts. High-interest debts, such as credit card balances, can quickly erode the value of your inheritance due to the compounding effect of interest. Many credit cards charge interest rates exceeding 20%, making it financially prudent to eliminate these debts first.
Using your inheritance to pay off high-interest debts can significantly reduce overall financial stress and lower monthly obligations. If your credit card debts are manageable, a partial paid approach could be beneficial, allowing you to reduce debt while also exploring investment opportunities.
Building an Emergency Fund
Building an emergency fund is crucial for securing your financial future. An emergency fund provides a financial cushion against unexpected expenses, preventing the need to incur debt during times of crisis. Allocating part of your inheritance to establish this fund can offer significant peace of mind.
Online savings accounts can be particularly beneficial as they often offer higher interest rates compared to traditional savings accounts.
This funds serves as your financial safety net, preparing you for unforeseen circumstances.
Investing Your Inheritance
After paying off high-interest debts and establishing an emergency fund, consider investing your inheritance. Inherited money can include various assets such as:
Cash
Stocks
Real estate
Personal items Integrating these assets thoughtfully into your investment portfolio is key to aligning with your financial goals.
A financial advisor can help clarify your investment strategy and ensure effective management of your inherited wealth. They can guide you in exploring various investment options and diversifying across asset classes to grow your money. It’s essential to take your time before making investment decisions to avoid hasty mistakes that could lead to financial loss. Seeking professional guidance can further enhance your decision-making process.
Divide your investments based on your time horizon for better planning:
Invest portions for short term goals needs.
Invest other portions for long-term goals.
Use a more conservative approach for shorter time frames.
Allow for more risk with longer time frames.
This balanced strategy will help you maximize the potential of your inherited assets while managing risks effectively to sell and inherit.
Planning for Long-Term Financial Security
Reassessing your financial goals after receiving an inheritance is key to long-term financial security. Communicating with financial advisors can provide clarity on managing your inheritance effectively and making informed decisions. They can help you establish a comprehensive financial plan that includes both short-term and long-term goals.
Retirement savings and wealth-building should be key long-term goals. Diversifying your investments based on different time horizons will help manage risks while maximizing growth potential. Seeing your inheritance as a blessing rather than a burden can reduce guilt and promote a healthier relationship with the money.
Charitable Giving with Inherited Money
Donating inherited money can provide personal fulfillment and potential tax advantages. Donating part of your inheritance to charity can lead to tax deductions on your federal income tax, reducing your taxable income. However, consider the limits based on income and donation type, as these can affect overall tax benefits.
Choose charities that align with your values and goals. Charitable giving can be a meaningful way to honor the legacy of your loved ones while making a positive impact on causes you care about.
Updating Your Estate Plan
Updating your estate plan after receiving an inheritance ensures your assets are distributed according to your wishes. Failing to update your estate plan can lead to unintended distribution of assets that do not align with your current wishes. Estate planning tools like trusts can facilitate direct transfers of property to beneficiaries, avoiding probate.
Revising your estate plan also requires updating beneficiary designations to reflect any changes in your financial situation, including other beneficiaries. A legal expert can help you incorporate new assets into your estate plan, ensuring all are accurately reflected and appropriately allocated.
Managing Emotional Aspects of Inheriting Money
Inheriting money often follows the loss of a loved one, making it an emotionally charged experience. The emotional journey of inheriting wealth includes stages like:
Disbelief
Anger
Euphoria
Guilt
Paralysis
Ultimately feeling ‘heirworthy’
Many individuals experience guilt after receiving an inheritance, feeling conflicted about their financial gain following the loss of a loved one. For example, this emotional turmoil can complicate the process of accepting the family inheritance.
This guilt can hinder one’s ability to enjoy the financial benefits and may lead to long-term emotional distress if not addressed. Making informed decisions about using an inheritance for debt repayment and investments is crucial, considering potential emotional factors and legal stipulations.
Summary
Inheriting money can be a life-changing experience, but it comes with its own set of complexities and emotions. By understanding the basics, navigating tax and legal considerations, and making thoughtful financial decisions, you can turn your inheritance into a lasting legacy. Remember to seek professional guidance, plan for both short-term and long-term goals, and address the emotional aspects to fully benefit from your inherited wealth.
Frequently Asked Questions
What are the immediate steps to take after receiving an inheritance?
After receiving an inheritance, it’s smart to pause and assess your financial situation by listing your income, debts, and expenses. Don’t hesitate to consult a financial advisor to help guide your next steps.
How can I minimize taxes on my inheritance?
To minimize taxes on your inheritance, consulting with a tax professional is key, as they can help you navigate state-specific tax rules. Think about strategies like donating appreciated assets to further reduce your tax burden.
Should I pay off high-interest debts with my inheritance?
Absolutely, it’s wise to use your inheritance to pay off high-interest debts; this way, you’ll save money in the long run and keep your inheritance from being eaten away by interest.
How much should I set aside for an emergency fund?
It's wise to set aside three to six months' worth of living expenses for your emergency fund. This gives you a comfortable cushion for unexpected situations that pop up.
How can I manage the emotional aspects of inheriting money?
It's important to acknowledge your feelings and consider seeking professional guidance to help you navigate the emotional aspects of inheriting money. By making informed decisions that reflect both your financial goals and the legacy of your loved one, you can find a balanced approach that feels right for you.