Losing a loved one can be a painful experience. Even when expected, the finality of death can be difficult to understand. It’s no wonder that people who are grieving often feel overwhelmed and unable to process information with the same mental clarity that they have in more normal circumstances.
Adding financial decisions to the mix can further complicate things. For many people, even the welcome news that they are the beneficiary of a loved one’s estate can bring waves of sadness and uncertainty. If you are ready to receive money or other assets from a deceased loved one, you may benefit from the advice of a financial advisor, estate attorney, and tax expert who can help you determine the best course of action to manage the gift wisely. They have given you. Here are some factors you may want to consider with their help:
The form of inheritance.
First, consider the form of inheritance you received:
• Cash: If the assets you inherited are in the form of cash, there are usually few complications. There is no federal tax on amounts inherited, although some states do have an inheritance tax.
• A life insurance settlement – If the deceased named you as the beneficiary of a life insurance policy, the payment you received is generally not taxable. You may also have the option to have the benefit paid over several years instead of a lump sum.
• A retirement plan: If you inherited an IRA or workplace retirement plan from someone, you’ll have 10 years to withdraw all of the money (this time limit does not apply to spouses or minor children). Failure to do so can result in a significant penalty. Taxes are due on distributions from traditional IRAs or work plans.
• Appreciated stock or other assets: If you inherited assets such as stocks or real estate, the cost basis of the asset is raised to the value at the time of the grantor’s death. That can result in significant tax savings when you sell the asset.
In particular, if you’re in a state of great emotion, don’t feel rushed into making decisions about what to do with the money. Slow down, seek advice, and consider your options within the context of your overall financial situation and goals for the future.
If you were in a comfortable financial position before receiving the inheritance, perhaps you would like to spend some of the money on a family trip or purchase a significant item in memory of your loved one.
On the other hand, if you want to put some or all of the money toward funding your major financial goals, there are countless ways to do so and honor your loved one’s legacy in the process. You may want to set up a 529 plan to help pay for your children’s college education in memory of the deceased. Alternatively, the money can be useful for a down payment on a house or a cash injection into your diversified portfolio that you will one day lean on when you retire. Whatever the case, consider working with a trusted financial advisor who can help you set it up with your long-term goals and financial plan in mind.
expect bumps in the road
It is not uncommon to experience some challenges or complications if an inheritance has arrived or is on its way. This is all the more reason to consider consulting with a financial advisor, real estate and tax professional to make sure you understand what you’ve received and how to best implement it. They can provide a sense of clarity and calm that you may need as you grieve the loss of your loved one.
Bronwyn L. Martin is a Financial Advisor and Chartered Financial Consultant with Martin’s Financial Consulting Group, a Wealth Financial Advisory Practice of Ameriprise Financial Services LLC. at Kennett Square and Havre de Grace. He specializes in fee-based financial planning and asset management strategies and has been in practice for over 22 years. To contact her: www.ameripriseadvisors.com/bronwyn.x.martin.