Inheriting Money? 5 Smart Things to Remember.
When you inherit a load of money, do you know what to do? Consider these tips.
The loss of a loved one comes with many emotions. In addition to sadness, many feel a sense of regret, sorrow, or even guilt. When a family member or friend leaves behind their assets to you it can be overwhelming. Here are 5 smart tips to keep in mind when you inherit money.
#1 Breathe
An inheritance can knock you on your backside for a few weeks. Slow down and process what’s happened and how this will impact you before you quit your job and buy a house, business, or collectible automobile. It may be a good time to get your own estate in order.
#2 Estate taxes are rarely your problem
The federal estate tax has undergone a major overhaul in the last few years. Very few individuals are impacted by this tax today. Even if you are inheriting money from someone who died with over $5 million in assets, this is not a tax paid by the person inheriting the asset. Some states do have an “inheritance” tax impacting certain beneficiaries but most do not. The person inheriting the money will never owe federal estate tax. This is owed by a small percentage of estates, not the beneficiary.
#3 Income tax is frequently your problem
If you receive an IRA or an annuity you may be in for a shock when find out what this means for your tax return the following year. This is where I see the greatest number of mistakes that could have easily been avoided. Annuities that could have been paid out over 5 years to spread the tax or IRAs that could have been “stretched” if the inherited IRA was set up properly are two common examples. This is the quickest way to shrink an inheritance and the best reason to see both a CPA and a CFP® before requesting any kind of distribution or re-registration
#4 No beneficiary? No Will? No easy task
Not everyone has taken the time to get their affairs in order. If you walk into a bank to tell them your father died and you are the only child and the sole heir, they will ask to see a death certificate. Once you hand it over they will look at the account to see who was named as beneficiary (this trumps what any Will says). If no beneficiary was named, the asset will need to be probated. If there is no Will to tell a court how to probate the asset you will likely need to get a Letter of Testamentary and other documents the bank or financial institution requires before anything is handed over.
#5 Your friend means well but…
Seek professional advice immediately. This means an estate attorney, a CPA, and CERTIFIED FINANCIAL PLANNER™. The service representative you spoke to on the 1-800 number at the mutual fund company that held your mother’s IRA does not count. Neither does the friend who told you you won’t owe any taxes because they didn’t when their grandma died. Requesting a distribution in the wrong name or registration can have lasting consequences. I’ve seen countless errors made by well-intentioned phone reps over the years that cannot be undone.
