A substantial inheritance can be both a blessing and a curse: a blessing because the money may come in handy eventually and a curse because it imposes a specific obligation on the recipient to utilize it. Here’s a guide for anyone who has or expects to receive a substantial inheritance.
KEY LESSONS
Take your time determining what to do with a vast sum of money you inherit.
A federally protected bank or credit union account can be a suitable place to keep your money while you make your decisions.
One ideal use for inheritance is to pay off high-interest loans such as credit card debt.
In most cases, you will not have to pay taxes on money you receive, but other inherited assets, such as securities, retirement accounts, or real estate, may have tax ramifications.
1. Don’t Expect to Receive It
First and foremost, if you are expecting a significant inheritance but have yet to get it, don’t count on it. Things may and will change. At the end of their life, your family or other benefactor may incur substantial medical or nursing care expenditures. They may decide to donate everything to charity. They could be duped by a con artist.
According to a report published in 2011 by the Bureau of Labor Statistics, the long-predicted inheritance boom as the World War II generation passed their riches on to their baby boomer progeny never occurred. Just about 21% of households reported receiving an inheritance or a gift of assets between 1989 and 2007.
Furthermore, according to the Federal Reserve, the average inheritance today is roughly $46,200—a sum that many families may find handy but not life-changing.
When the time comes, the heirs to the baby boomers’ fortune may be disappointed as well. For this strong reason for younger generations should avoid going into too much debt, and not rely on a windfall that may never come.
2. Proceed With Caution
If you get a large inheritance, don’t feel obligated to make hasty judgments. Dealing with bereavement is difficult enough without adding money to the mix.
What you should do first is determined by the form (or forms) of your inheritance. For example, if you inherit money, you may want to keep it secure for a while. An Institution that is federally insured is an excellent option. Accounts of this type are insured for up to $250,000 per depositor and per financial institution. You can increase your coverage by opening multiple types of accounts. For example, if you open a single and a joint account, you’ll be insured for a total of $750,000.
If you inherit more money than a single financial institution can insure, you can divide it amongst several.
If you get other types of assets, such as securities, retirement funds, real estate, or a business stake, you must work with the executor of the estate to legally transfer everything into your name.
It’s also worth noting that, even if you’re in a hurry, getting what’s owed can take time. Probate—the legal procedure through which an estate’s assets are dispersed under the supervision of a court—can take weeks to years, depending on the complexity of the estate and whether anyone contests the will. It usually takes about nine months.
3. Get Help
Depending on your level of comfort in making financial decisions, you may wish to pay for professional advice. A financial planner can advise you on how to manage your money in the short term as well as create a long-term financial plan that takes into account all of your assets and liabilities.
A fee-only financial adviser, who earns no compensation for directing you toward specific assets but costs you for their services, might be a smart alternative here. This system is meant to remove any potential conflicts of interest on the side of the planner.
A planner can evaluate if you have a suitable fit for your portfolio or if you should sell them and invest the proceeds elsewhere.
4. Pay off your debts
Paying off debts, especially high-interest obligations like credit cards or school loans, is a good use of inherited money. If you’d feel more safe with a paid-off mortgage, go ahead and utilize the inheritance for that.
5. Invest the Balance
After you’ve paid off your bills, you can decide what to do with the money left in your bank or credit union accounts. Again, do not rush.
You should probably start investing the money with the advice of a financial counselor, or on your own if you like. In terms of investing concepts, inherited money is no different than money you earned for yourself. Consider the inheritance in the context of your overall portfolio unless you choose to keep it separate for sentimental or other reasons. Strive to be suitably diversified over a range of investments with varying degrees of risk. Therefore, rather than investing it all at once (and risking buying at excessively high prices), consider doing it over time with a method like dollar-cost averaging or value averaging.
Your inheritance may also allow you to increase contributions to your retirement or 529 college savings plan accounts. You can’t put inherited money in a retirement plan since it isn’t earned income or other taxable compensation;
6. Recognize the Tax Consequences
Unless you inherit a large sum of money, federal estate taxes are unlikely to apply. In 2022, for example, those provisions will apply only to estates valued at $12.06 million or more.
Certain sorts of assets, however, do have tax ramifications. For example, if you inherit stocks, keep track of how much they were worth on the day the person from whom you got them died. This is because you’ll need to know your cost base if you decide to sell them in the future.
Inherited IRAs are also more difficult to understand. The tax requirements differ based on whether the decedent was your spouse or another person, as well as the type of IRA: regular or Roth. With Roth IRAs, withdrawals are often tax-free, but you must typically drain the account within five years.
7. Go all out. If you must, but do not go insane
It’s all yours now. But keep in mind that once it’s gone, it’s gone, however if you invest wisely, you’ll have it for years to come. You may even be able to pass it down to your descendants someday.
What Constitutes a Substantial Inheritance?
It is up to the individual who receives the inheritance to determine whether it is large, tiny, or somewhere in between. As one might assume, wealthy families pass on more wealth. For example, in 2019, the wealthiest families received an average legacy of $720,000, while the lowest income families (those who received any inheritance at all) had an average bequest of $9,700.
Another way to look at it is in terms of impact. A $9,700 inheritance may be a lifeline for someone with limited other possessions, whereas a $719,000 inheritance may be insignificant to someone who is already wealthy.
Where Should I Put a Big Financial Windfall?
A federally insured bank or credit union would be a smart place to deposit a substantial cash inheritance, at least in the short term. Your money will not make much interest, but as long as you keep it within the legal limitations, it will be safe until you decide what to do with it.
8.What Happens If I Get a Home As a Gift?
There are three options if you inherit a house: 1. keep it and live in it, 2.keep it and rent it out, or3. sell it. It’s important to note that if you sell the house, you may owe capital gains tax.
Another factor to consider is whether or not the house is completely paid off; if it still has a mortgage, you will be responsible for paying those payments. That is also true for municipal property taxes, insurance, and so on.
In conclusion
A huge inheritance, if used carefully, can make a significant difference in your life. But, don’t rush into any decisions and, if necessary, seek professional guidance.