How to Manage an Inheritance
How to Manage an Inheritance
If you’ve inherited money and don’t know what to do next, you’re in the right place.
I’ve got the steps you need to take to manage your inheritance, make smart financial decisions, and build a plan to use your inherited wealth to create positive impact and support your vision for the future.
Posted on January 31, 2024 by Katherine Fox.
How to Manage an Inheritance
How long will it take for my inheritance to arrive?
The time takes to receive an inheritance can vary significantly depending on several factors:
The complexity of the deceased person's estate
If the decedent had a valid will
The efficiency of the state’s probate process
The probate process, which involves validating the will, settling debts, and distributing assets, can take several months to a few years. This timeframe is subject to change based on the specifics of each estate and the state(s) where probate is happening.
Delays can arise from legal complexity, beneficiary disputes, or the need to liquidate assets.
The time it takes to receive an inheritance can also be influenced by the type and nature of the assets involved. Liquid assets such as bank accounts and publicly traded securities may be distributed more swiftly than non-liquid assets like real estate, collectibles, closely held business interests, or alternative investments that require additional time for valuation and transfer (called “re-papering” in the biz).
If the person you are inheriting from used complex trusts or asset ownership structures in their estate plan, the distribution timeline may be significantly longer or shorter than the traditional probate process.
Estate taxes and estate debts also play a role in the time it will take you to receive your inheritance.
If you need more specific information, you should talk to the estate executor or an estate planning attorney to get more concrete details as it relates to your inheritance.
What do I need to know about managing an inheritance?
To manage your inheritance you’ll need to think about the legal, financial, and emotional challenges new wealth brings.
Financially, you are now managing more money than you’ve ever had before. Before making any major decisions, take time to think through your plan and ensure you’re using funds where they will be the most useful for you.
It may be useful for you to find an investment advisor who specializes in inheritance to help you build a portfolio that aligns with your long-term values and a financial plan to invest, grow, and create positive impact with your inheritance.
Legally, you now have more money to protect. You should review your estate plan and contact an estate planning attorney to make any updates to your will, powers of attorney, or other estate documents.
If you don’t have any estate documents, you should reach out to an attorney to get them set up.
You’ll also want to review your insurance policies to make sure you are legally protected in the case of a lawsuit. Having more money makes you a target for bad actors. It may be time to increase your liability coverage through your homeowners and car insurance policies or to add an umbrella policy over those coverages.
Emotionally, someone you were close with just died. It’s a lot to process. Give yourself the grace to process your emotions as needed and understand that you may not be able to check items off your to-do list as quickly as usual.
It’s OK. Everything will get done eventually.
How to Manage an Inheritance
What are the first three steps I need to take to manage my inheritance?
1. Take inventory of everything you inherited.
The first step of managing your inheritance is understanding exactly what you inherited. Make a list of everything you received and identify the current value of all inherited assets, including:
Cash and bank accounts
Liquid investments
Real Estate
Illiquid Investments
Collectibles
Valuable personal property
You’ll want to ask an attorney if you got a step-up in basis on these assets. If so, you should be free to sell them with little to no tax consequences.
2. Decide which inherited assets you want to keep and which you want to sell.
Think about which assets you want to keep and which you want to sell. Some assets, like real estate and illiquid investments or collectibles, may be difficult to sell quickly while stocks, bonds, and mutual funds or ETFs are easy to liquidate.
Your decision on what to sell and what to keep should be based on your overall need for money as well as your investment preference.
Maybe the person who died was heavily invested in oil and gas, or weapons companies, and you want to bring your inheritance in line with your personal values.
Maybe you want to sell stock because you need a down payment for a house.
Maybe you want to sell real estate because you don’t want the headache of owning a 15-unit apartment building.
3. Take time to reflect before finalizing decisions about managing inherited wealth.
After you decide what to keep and what to sell, hold off on taking any action until you have had more time to reflect and speak to a financial advisor who helps inheritors. Once you sell something, it can’t easily be un-sold.
“A skilled financial professional can assist in evaluating inherited assets, creating an investment strategy aligned with your personal values, and providing guidance on the tax implications of your inheritance. They can also help ensure that the management of your inherited wealth aligns with your vision for your long-term financial future. ”
Who do I need to help me manage an inheritance?
The first and most important professional who can help manage your inheritance is an estate planning attorney. This attorney can help you understand what you inherited, the tax consequences of your inheritance, and how to protect your inheritance.
If there are any questions or disputes over your inheritance an attorney will be an essential advocate in your corner.
In addition to legal expertise, a financial advisor plays a crucial role in managing the financial aspects of your inheritance. A skilled financial professional can assist in evaluating inherited assets, creating an investment strategy aligned with your personal values, and providing guidance on the tax implications of your inheritance. They can also help ensure that the management of your inherited wealth aligns with your vision for your long-term financial future.
Depending on the complexity of your inheritance, you may also need to hire a CPA to help navigate the tax consequences of your inheritance. This is especially true if you inherited a pre-tax retirement account and need to fully distribute it within the next 10 years.
How do I manage the tax implications of my inheritance?
Managing the tax implications of an inheritance is a critical aspect of preserving and maximizing your new wealth.
First, make sure you understand the step-up in cost basis for inherited assets. In many cases, the value of inherited assets is adjusted to their fair market value at the time of the decedent’s passing. This can reduce or eliminate the impact of capital gains tax when these assets are sold.
Second, you need to learn about the withdrawal rules for inherited IRAs. Most beneficiaries are required to fully empty inherited IRAs within 10 years after a decedent passed away. All withdrawals from a traditional IRA add to your taxable income, creating a tax headache for those who inherited large retirement accounts.
Inheritors of large IRAs or 401(k)s should work with a financial advisor and a CPA to build a tax-efficient plan to withdraw funds within 10 years while reducing their total tax liability.
Third, you should explore all available tax exemptions and deductions. Depending on your situation, there may be opportunities to reduce your overall tax burden through strategies such as charitable giving or utilizing specific tax-advantaged accounts.
As a financial planner specializing in Millennial and Gen Z inheritors with inherited wealth,my role extends to coordinating with tax professionals, providing a comprehensive understanding of the tax implications, and offering guidance on strategic financial planning to optimize your tax position. By proactively addressing the tax aspects of your inheritance, we can work together to ensure that your wealth is managed prudently and aligned with your long-term financial goals.
LEARN MORE ABOUT MANAGING AN INHERITANCE
How long do I need to wait before spending my inheritance?
There isn’t a one-size-fits-all answer, but I advise exercising patience and thoughtfulness throughout the inheritance process.
Before making any significant financial decisions, take the time to assess your overall financial situation, including existing debts, emergency funds, and ongoing expenses.
You shouldn’t make any major spending decisions without establishing a clear understanding of your financial goals, objectives, and personal values.
Consider working with a financial planner who helps inheritors create a financial plan and investment portfolio tailored to their individual circumstances and values.
This plan should encompass your short-term needs, long-term aspirations, and the potential impact of the inheritance on your overall financial picture. It should also include an exploration of how your new wealth can help create a positive impact in the world around you.
Incorporating a waiting period allows for emotional adjustment and thoughtful reflection after the passing of a loved one. While it isn’t necessary for all inheritors, taking time before making major decisions provides the opportunity to move forward with a clear understanding of how financial decisions fit into your long-term plan.
Let’s take the next step together
Understanding how to manage an inheritance is not easy. Beneficiaries can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, you can download The 20 Inheritance Terms you Need to Know, or reach out to Katherine Fox, CFP® and CAP®, a financial planner for inheritors to learn how Sunnybranch can help you build a plan to manage your inheritance.
