By John C. Fales
Although an inheritance typically comes from some form of loss, it could mean a significant monetary gain for the receiving party.
If you have advance knowledge of the incoming inheritance, you may be better prepared for how to handle it, but there are always things you should consider in this situation. Let’s take a look at several of those considerations:
1. Understand Tax Consequences
Depending on the type of inheritance, there may be tax consequences of which you aren’t aware. This could depend on the type of asset inherited, such as annuities, Individual Retirement Accounts (IRAs) and 401k accounts. You should understand if you are, or could be, responsible for ordinary income taxes, capital gains tax, inheritance tax or an estate tax and how that can impact the value of your inheritance.
Generally, estate taxes are paid by the decedent (person who died), but in some instances, the person inheriting the assets can be subject to estate taxes as well.
2. Consult with Your Advisors
Receiving prudent financial advice will help you assess your goals and allocate or invest the funds in a method designed to help you reach these goals in the timeframe of your wishes. You may choose to leave some of the funds in your bank account, but be careful not to store too much in a non-producing manner that may cause you to miss out on potential growth.
In addition, be wary of sales pitches that could tie your money up in illiquid scenarios (ex. privately held businesses).
In a blended family situation, you may want to keep these assets separate in the event of a divorce or premature death. This could be a great time to do a check-up on your estate plan and ensure your assets are bequeathed to your intended heirs. You may also consider holding the assets in a protected form of ownership, such as a Trust.
Consulting with your Certified Public Accountant (CPA), your attorney and your financial advisor can help you determine the best direction to take.
3. Give Yourself Time Before Making Large Purchases
Have you heard of lottery winners that eventually file for bankruptcy? When you inherit a large sum, you might have the desire to spend, sometimes unwisely.
Think, are these purchases prohibitive based on the value relative to my income? If an inheritance can pay for one (or more) expensive item you wouldn’t normally buy, but your monthly income is insufficient to keep up with the ongoing expenses, you may actually find yourself going backwards. Even when you pay for a house, car, or boat in cash, there are expenses related to these items that will continue indefinitely, such as property taxes, insurance and maintenance.
You may also find yourself in an emotionally vulnerable state when your inheritance comes, based on your degree of loss. If you are in the grieving process and have the ability to hold off on large purchases, do so. You may have more clarity about how you want to manage the inheritance when you’ve had time to consider your entire situation.
4. Handling Requests of Favors or Loans
Although it’s an unfortunate topic to consider, friends and family may start to come out of the woodwork if they hear you’ve come into a financial windfall. What may start as a simple favor here or small loan there could become an endless cycle of requests for money. I have even seen instances where well-meaning people were taken advantage of by their friends, siblings, and even parents.
Keep in mind that the value of a dollar is in the eye of the beholder. You may inherit $2 million and have money to spread around or you may inherit $20,000 and not have any to spare, but some people might feel entitled to a piece of your inheritance no matter the size.
No matter the size of your inheritance, taking time to understand its impact on your financial situation is important.
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Published for the blog on August 12, 2019 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.