Written by: Zach Binzer, CFP®
If you’ve recently inherited money due to the unexpected passing of a loved one, you’re likely wondering what to do next. We’ve compiled answers to some of the most commonly asked questions surrounding what to do with inheritance money. Read on to learn more or contact Foster & Motley for assistance from a financial advisor.
Where do I start?
As you begin to sort through the logistics of receiving your inheritance, there are two main items to consider:
- Were there any estate planning documents in place? Your loved one may have kept these in the same place as other important documents (think a safe, filing cabinet, or fireproof box). In addition to a will prepared by an attorney or a handwritten document indicating their end of life wishes, you will likely also need your loved one’s birth certificate, social security card, passport.
- Is there an estate planning attorney involved? If you find end-of-life documents, consider contacting the attorney who prepared them as they may be able to help you with next steps. If they are unable to help you, there are no prepared documents, or you just prefer to use a different attorney, we still recommend seeking out counsel to help guide you through next steps.
Who else needs to be involved?
In addition to your loved one’s estate planning attorney or the attorney you’ve enlisted to help, you’ll likely also need to contact the following parties (your attorney can also help you determine this):
- Financial Advisors: If there’s a known financial advisor involved with the assets, they can help guide you through the process of when and how to contact financial institutions involved with your loved one’s accounts.
- CPA or Tax Advisor: Your loved one’s passing will have implications on their final year’s tax return, and there could also be estate tax returns to sort through. A CPA or tax advisor can help you make sure everything is in order and filed in a timely manner.
- Anyone else listed on end-of-life documents: This could be an executor, trustee, and other beneficiaries.
How long will it take to receive the inheritance?
Unfortunately, there’s no one-size-fits all answer to this question - it all depends on the types of assets and complexity of the estate. Many estates are settled within a year, but it could be longer or shorter depending on the unique circumstances. That said, a financial advisor can help you organize and streamline the process to keep things moving along. They can also help you think ahead and determine how receiving your inheritance affects your own financial goals going forward.
What are the tax implications of receiving an inheritance?
Currently, every individual has a lifetime exclusion from estate tax on estates of up to $11,700,000. For married couples, this doubles to $23,400,000. If the estate has assets less than this, it will likely not have a federal estate tax liability. There are proposals in Washington, DC that intend to reduce these exclusion limits. Even if the estate is less than $11,700,000 and not subject to federal estate tax, many states also have an estate tax or inheritance tax with different thresholds. You may also need to sort through some requirements related to income tax (i.e. filing an income tax return for the portion of the year your loved one was alive). These will vary situationally, but your attorney and/or tax advisor can help guide you through your specific situation. Depending on the type of assets that are inherited, there may be tax consequences to withdrawing that money (for example, money held in a traditional IRA). Your financial advisor will be able to help you understand how to utilize the assets you’re inheriting in a tax efficient manner.
How do I handle transfers to other named beneficiaries?
You, or your advisor, will notify financial institutions that the account owner has passed. The institution will reference the documents they have on file to determine beneficiaries, open accounts in each recipient’s name, and divide the assets between the respective accounts. The beneficiaries can either leave the money with that financial institution or transfer it elsewhere. If the list of beneficiaries is not up to date, or assets are not titled correctly, the transfer of assets can become a much more complicated process that often involves probate court.
What if I’m not ready to decide what to do with my inheritance money?
After your loved one has passed, you have to move forward with administering the estate and distributing money to all beneficiaries. Then, each beneficiary can decide how to proceed with their assets at their own pace. If you don’t already have a financial advisor, consider working with one going forward. A financial advisor can help you sort through logistics and determine how to allocate your inheritance money in a way that aligns with your overall financial goals and supports your financial future. Some people spend their inheritances, some use it to add to their retirement savings or investments, some roll it into their homes or children’s college savings, and some use it for charitable intent. The choice is yours, but working with a financial advisor who has your best interests in mind can bring peace of mind as you sort through these decisions.
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