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If you’ve found yourself face-to-face with an inheritance and have very little idea of what to do with it, this article is for you. Whether that inheritance is an unfathomable, life-altering sum or just a few thousand dollars, you’d be wise to take your time before deciding how to allocate it.
If the inheritance was passed down by someone close to you, there’s a wealth of emotions that need processed before you move on. If you make decisions too quickly, you risk ending up with nothing like many others who’ve made ill-advised investments, lavish purchases, and went on spending sprees. Before you do anything else, reach out to Heban, Murphree, and Lewandowski. Our experienced estate lawyers can answer your questions and carefully guide you through the inheritance process.
As they say, only two things are certain in life—death and taxes, and inheritance emphasizes that like no other. In general, federal estate taxes are only relevant if you’re being left a sizeable amount of money. However, there are still quite a few scenarios that bring the tax man calling. These include inherited mutual funds, stocks, and other investments within a taxable account.
The value of a taxable asset is stepped-up to the value on the day of the original owner’s death. This means that if your grandfather had stocks valued at $500 on the day he passed, and you sold them immediately, you would pay no tax. If you waited to sell the stock until it was worth $700, you would pay tax on the $200 in profit from your inheritance. Alternatively, you are eligible to claim a loss if the amount you sold for is less than the stepped-up value.
With this knowledge, selling inherited stocks or other investment accounts shortly after receiving the inheritance can be a shrewd financial maneuver if you’re using them to pay off debts with high interest like credit cards or student loans. You can also recalibrate your portfolio by selling inherited stocks that are no longer profitable and diversifying tax-free.
Finally, remember that if real estate is part of an inheritance, you’ll still be obligated to maintain the home and continue to keep taxes and insurances current, whether from the estate funds or your pocket. At this point, you can decide whether you want to live in the home, rent it out for extra monthly income, or sell it and treat the profit as a cash inheritance.
Unfortunately, when someone who isn’t used to excess money comes into a large inheritance, they feel overwhelmed. Others feel invincible, as if their funds will never run out. Unfortunately, according to the National Endowment for Financial Education, 70% of beneficiaries who receive a large sum of money run through it in under 3 years. Don’t let this be you.
Consult with a financial advisor or lawyer who can guide you in the right direction. They should have your retirement and financial well-being in mind. Talking with someone who isn’t related to the emotions surrounding death and inheritance can help you keep a level head through the entire process.
If you find yourself stuck with credit card debt, now is your time to get that monkey off your back. Any high-interest student loans, personal loans, mortgages, and home equity lines of credit should be paid off before doing anything else with your money.
If you’re aware that you’re the type of individual who might run out and buy a brand new Ferrari with your limited inheritance, you need to protect yourself from yourself. This is especially true because we might not value “found money” from an inheritance the same way we value money we earned through hard work. Investing in a savings account with a penalty fee for early withdrawal can keep you from jumping the gun and spending the money before you’ve had time to grieve and plan for the days ahead.
Depending on your age, you should contribute as much as you can to your 401k and sign up for an IRA. Investing in a taxable brokerage account and opening a CD can be a solid investment for your future.
If you don’t already have one, you should set aside 6-month’s salary for a time where you might experience financial hardship, whether that’s a lost job, car or house repairs, or medical bills. This is especially important if your inheritance isn’t a life-changing amount.