Getting an Inheritance?

What You Need to Know about Decisions, Taxes, and Spending After Inheriting a Large Sum of Money

Are you getting an inheritance soon? Even if it might be 10 years out, receiving a large inheritance will change your life, especially if it bumps your net worth past seven or eight figures. Planning for what you’ll do when that inheritance arrives should begin now. Otherwise, you run the risk of following the all-too-common tragic path of those who have squandered a huge inheritance and find themselves less happy, less financially secure, and sometimes in even deeper debt. If you want more guidance in finding an advisor to help you plan out how to manage your inheritance, get the Ultimate Guide for Choosing the Best Financial Advisor – a free resource developed to help you get the best possible financial outcomes.

STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION

 

7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning

 

The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.

Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.

Don’t let that be you.

You probably have a lot of questions about inheritance. Is it taxed? Does property count? What do I do with an inherited IRA or an inherited business? Who can I trust to help me with this? We’ll answer all these questions about inheritance in this article.

But before we get to that, if you are expecting to receive a large inheritance soon, you are strongly encouraged to do nothing at all before talking to a financial planning professional. The size of the inheritance can help determine who you seek out.

Pillar Wealth Management works with high net worth and ultra-high net worth clients with $10 million to $500 million in liquid assets. If your inheritance will place you within our range, our wealth management team might be a good fit for you. You can reach out and schedule a quick introductory call to see what services we offer.

 

Another great resource for anyone getting an inheritance that represents a large increase in their net worth is our hardcover book. This special book was written to help high net worth families protect their wealth so it doesn’t get lost, wasted, or squandered. Get your complimentary copy of The Art of Protecting Ultra-High Net Worth Portfolios and Estates: Strategies for Families Worth $25 Million to $500 Million.

What to Do First After Getting an Inheritance

Here’s the best advice you can possibly hear for what to do first after receiving an inheritance:

Do nothing.

In other words, avoid making any rash decisions. Don’t go transferring money, buying cars, paying off debt, or anything else that might pop into your mind – no matter how responsible you might think it is. Do nothing.

Why? A few reasons. First, depending on the form of the inheritance – money, retirement accounts, property, etc – what you do can have serious tax consequences. If your deceased relative was over 72, it can be even more costly if you take certain actions at the wrong time.

Second, your deceased relative may have outstanding debts, and if you go spending all that money without first settling their debts, you’ll find yourself up a creek without a paddle. You may also be on the hook for estate contribution payments before you receive their money. Again – you need to know this stuff before you do anything.

It is like waiting for the official release date of a certain thing instead of going all the way without considering any other elements. So, do nothing.

Third, by waiting, you give yourself time to grieve your loss. That’s the first thing you should be doing. Money is money. It will still be there two weeks later. Take time to process your loss first, because managing an inheritance can get complicated, frustrating, and time-consuming. Once you start opening up that box, you won’t have as much room in your life to grieve.

Once you are ready to move on, you will first want to speak with a professional wealth manager or financial planner so you can avoid making big and costly mistakes with your inheritance.

Let’s dive into some of the biggest issues and questions you’re probably already thinking about.

Inheritance

What Types of Assets Can I Inherit?

Inherited assets can come in many forms. The most obvious is simple cash. This can be money in a traditional checking or savings bank account, a certificate of deposit (CD), or a money market account. This type of inheritance is the easiest to work through from a procedural standpoint.

You can also inherit investment accounts and retirement accounts such as IRAs, Roth IRAs, 401k accounts, perhaps pensions. The details of how to manage these are far more complex than simple cash accounts.

Beyond that, you can inherit individual stocks and other specialized investments, which also carry their own set of decisions with consequences.

You can inherit property. This can come in the form of real estate assets they owned and lived in, or rented out to someone else. It can also include other hard assets such as collectibles, cars, artwork, and other valuable items. Even a good-sized gun collection can be worth quite a bit of cash. It adds up.

You can inherit businesses, which again gets complicated very fast, and presents you with some challenging decisions we’ll get to later.

You can inherit life insurance if you are the beneficiary in the deceased person’s policy. This is really just another form of cash inheritance, but it comes with different tax consequences from the other types of cash.

As you can see – inheritance can get complicated very quickly. The more stuff you inherit, and the more ways that inheritance comes to you, the more time it will take to sort through it and make smart decisions. And if the deceased person left no will or estate plan, like former Zappos CEO Tony Hsieh who died suddenly at age 46, you can multiply the difficulty of all this by 20.

11 Things to Do With An Inheritance

Once you’ve got a clear picture of everything you have inherited, what next? Here are 11 things you can do with an inheritance. The great thing is, you can do more than one of these.

Spend It

Let’s get this out of the way first. Yes, you can spend the cash. And frankly, you should. You should do something enjoyable with some of the cash you inherit. Take a trip. Go to a fancy restaurant or two, or five. Do something special with your family. There’s nothing wrong with this – but just don’t go overboard. You should not spend large amounts of your inheritance on yourself all at once.

But doing something memorable is certainly reasonable as part of your plan.

Pay Off Debt

You might have big debts. Or maybe your kids do. Maybe someone went to medical school and owes $250,000 in debt. You might be able to help with that. Mortgage debt, credit card debt, medical debt, college debt, auto loans, home repair loans – if you have outstanding debts, your inheritance may be your one chance to put a big dent in them or eliminate them altogether.

Something to strongly consider.

Use It to Buy a House

Depending on the size of your inheritance, you might use it to help with a down payment on a new home or to purchase one entirely with cash. Either way, if your living situation could benefit from a large cash infusion, your inheritance might open the window of opportunity.

Give It Away

Generosity tends to be rewarded. Most business owners have learned that giving some money away seems to lead to financial rewards. If you’ve just received a large inheritance, consider looking for ways to give some of it away. This might be your best chance to make a significant impact in some parts of the world.

Consider issues you care about. Look at nations or people groups you’ve visited or read about that need help. You could start a college scholarship fund, create a foundation to fund environmental projects, give to your alma mater, or any number of things.

Giving away part of your inheritance is a terrific way to ensure your cash gets used for good.

And hopefully you see already why the best inheritance financial planning will include many items on this list, not just one. You can give cash away, spend some on yourself, pay off debt, and use it to help buy a new house. You can do all four. And there are seven more ideas to come.

Invest It

You might decide to invest part of your inheritance in stocks, commodities, bonds, or mutual funds. See if you can double a portion of the cash in five to ten years to stretch it farther.

Investing requires smart financial planning and above all a smart asset allocation. Asset allocation has been proven in studies to account for nearly all of a person’s investment success. More than any other factor, by far. But how do you know which asset allocation is best for you, and how to change it over time?

A lot of work goes into doing this right. People frequently call our office with questions about this.

We often refer them to this free guide – Improving Portfolio Performance. It will be extremely helpful to you if you want to invest part of your inheritance and get results you can be happy with.

Save It

Saving is different from investing. Investing might have a ten-year turnaround. For example, you could invest a $1,000,000 portion of your inheritance with the goal of doubling it within ten years. But saving implies a focus on long term goals, financial security, retirement, and the experience of what we call ‘financial serenity.’

Your inheritance can help you achieve that feeling if you manage it properly.

To help you manage it properly, you must begin by making some shifts in your thinking and planning about investments. Use our quick cheat sheet to help clarify these. It’s called 5 Critical Shifts for Maximizing Portfolio Growth Strategies.

Where can you save your inheritance?

You can save portions of your inheritance in retirement accounts like IRAs and Roth IRAs. You can save it in 529 funds to secure your kids’ or grandkids’ future college expenses. You can invest it in a Health Savings Account (HSA) to protect against future medical expenses. You can instantly create a 6-month emergency fund. You can start a certificate of deposit (CD) ladder. And – you can save it in ALL these places and more. The more wealth you inherit, the more options you have.

See why just spending it all in two years is a terrible idea? Look at these amazing choices before you!

Set It Aside for Future Major Purchases

You might already have big goals in mind that your inheritance can help you solidify. But, maybe you’re not ready to make that big purchase or major home renovation project just yet. So, put the cash aside that you’ll use for that so it’s there when you are ready.

Designate It for Your Heirs

Maybe you’ve always wanted to start setting cash aside to pass on to others for their inheritance, just like you’re about to receive. Well, now you can accelerate those plans in a big way.

If you like the idea of setting up trusts, so the cash is secured for the people you want it to go toward and escapes estate taxes, now is the time to start building that into your financial planning. Pillar Wealth Management helps high net worth families create estate plans that dramatically reduce their estate taxes using this approach.

We’ve had people come to us with over $100 million in assets and no estate plan. They are in peril of losing nearly half their fortune to taxes when they die. If this is you, you need to act nowSchedule a quick introductory call with our wealth management experts.

Fund a Business Startup

The possibilities here are endless. But if you have a business idea, now might be the time to go for it. Again – don’t use all the cash for this. That would be reckless. But your inheritance can open up the possibility of doing something you’ve always dreamed about.

Buy Investment Properties

Your inheritance can also put you in a position to expand your real estate holdings. Get in on an apartment complex, duplex, or four-plex, for example. Or buy a second or third home and use it as a rental. Buy a few houses in poor condition, renovate them, and flip them.

If property investment is something you’ve always wanted to get into, now might be your best chance.

Buy Life Insurance

As you’ll see later, life insurance can offer you and your heirs protection from taxes. So, with the inheritance you just received, now might be the best time to purchase a life insurance policy that will one day protect your children.

There’s a lot more to inheritance planning that we could talk about. Here’s a 7-step guide to high net worth inheritance planning.

Is Inheritance Taxable?

Unless you live in one of six states, the answer is no, your inheritance will not be taxed. The six states that do charge an inheritance tax are Nebraska, Maryland, Iowa, Kentucky, New Jersey, and Pennsylvania.

Each state has its own specific tax rates, specifications for who is exempt, and other details.

If you don’t live in one of those states, you will pay nothing when you receive an inheritance. However, you may still be liable for paying the estate contribution on the assets of the deceased person. 12 states plus the District of Columbia charge an estate contribution, and so does the federal government. Each has its own exemptions, and anyone below those limits pays no estate contribution.

We’ll talk about the differences between these in a moment.

 

Inheritance

Who Pays the Inheritance Tax?

Let’s get the good news out first. The surviving spouse will never pay inheritance tax. And immediate relatives such as children (son or daughter), surviving parents, and grandchildren also will pay no inheritance tax.

But beyond that, each of the six states that charges an inheritance tax has different rules. In general, the more distant the relationship between the man receiving the inheritance and the deceased, the more likely you will pay a tax. So, if your father’s brother’s nephew’s cousin’s former roommate leaves you part of their estate as an inheritance, and you live in one of those six states, you will pay an inheritance tax.

In fact, let’s be clear on this point.

What matters is where you live, not where the deceased person lived. If the deceased person lives in one of the six states that charge an inheritance tax, but you live in Florida, you will pay no inheritance tax. You must reside in the state that charges the inheritance tax in order to be liable for it.

Can I Avoid Paying the Inheritance Tax?

If you do live in one of those six states and receive an inheritance, there’s not much you can do to avoid the tax after the person has died. Your best advice is to look back at all the ways to use your inheritance and consider once again the wisest and responsible approach with help from a financial planner.

If you will owe some of your inheritance in taxes, then don’t spend it all!

Set aside the 5%, 10%, or whatever else you’ll be charged for this in the future, and have it ready to pay so it doesn’t feel like a loss.

Now, there is actually a way to prevent your heirs from having to pay inheritance tax on your wealth. But this approach requires foresight and planning. The simplest method is for the person whose estate will be giving the inheritance to purchase a life insurance policy that will pay out a guaranteed death benefit.

If you are listed as the beneficiary on a person’s life insurance policy, that money is not taxed at all.

For example, suppose you plan to leave $2 million to four somewhat distant relatives after you die, but those relatives all live in New Jersey. You could purchase four $500,000 life insurance policies instead. Do this many years in advance, ideally.

Then, instead of those heirs receiving $500,000 each but having to pay somewhere around $50,000 of that in inheritance taxes, they will get the full $500k tax-free.

This will reduce your tax of estate bill too. And then, you can allocate the rest of your assets to other things and not worry because you know your heirs are taken care of.

But remember – immediate heirs like children will likely not have to pay the inheritance tax.

As you can see, the more we discuss these things and get into the details, the value of working with a wealth management professional becomes more obvious. There are simply too many pitfalls, decisions, strategies, options, and unforeseen consequences. If you have a large inheritance coming, schedule a quick introductory call with one of our elite wealth managers.

Differences Between Inheritance and Estate Tax

Let’s clarify a few things to make sure we’re all on the same page.

Estate taxes are:

– Paid by the deceased person’s estate

– Owed to the federal government if the estate is valued above the exemption limit

– Charged by 12 state governments and the District of Columbia

– Subject to exemption limits that vary by state

The person who dies must have been living in the state that charges the tax for estate in order to have to pay it. A person inheriting money who lives in one of these 12 states pays nothing if the person who died lives in a different state. Except for Maryland, which charges both types of tax.

See 10 ways to avoid or greatly reduce your estate taxes

On the other hand, inheritance taxes are:

– Paid by the heir – the person or entity receiving the inheritance

– Not charged by the federal government – there is no federal inheritance tax

– Charged by 6 state governments

– Subject to exemption limits and qualifications that vary by state – not everyone receiving an inheritance has to pay a tax even in the six states

The person inheriting the money must live in one of these six states in order to be subject to the tax. It doesn’t matter where the deceased person lived.

Is Inherited Property Subject to Taxation?

The premise of inherited property is very different from inherited cash, which is all we’ve been talking about so far.

If you inherit property, this is considered a different type of income, and you can be charged taxes for its value by the federal government. But it depends on what you do, and when you do it.

If you inherit property, the government ‘steps up’ the value of that property to the day the previous owner died. This is a good thing. If you then sell that property for that new stepped-up value, you will pay no taxes on it. However, if you sell it for more than its new value, you’ll pay taxes on the difference.

So, suppose your parents bought a home in 2005 for $200,000, and now it’s worth $400,000. If you inherit it and sell it for $400k, you’ll owe no taxes. That’s a good deal. But if you keep the home, say as a rental property, and sell it for $500,000 a few years from now, you’ll pay capital gains taxes on the $100,000 profit.

However – you can avoid that too if you live in the home for two years. Then, you can exclude up to $500,000 of the property value from your taxes.

Once again…getting complicated! We recommend you seek someone’s professional help, preferably someone who deals with these matters all day long.

Is an Inherited Business Subject to Taxation?

If you thought the inherited property was complicated, you haven’t seen anything yet.

At first, inheriting a business seems to work much the same way as inheriting property. The value is stepped up, and you are only taxed on the profits from the business sale above that new value. But it’s not that simple.

The business will also be valued as part of the owner’s estate. So if the business is worth $10 million, and the owner had $4 million in other assets, you’re now well above the federal estate contribution limit (and the state limit in all 12 states that charge an estate contribution). That business has just led to a huge estate tax bill, and unless you sell the business, you’ll have to pay the estate tax (NOT the inheritance tax!) out of the $4 million in other assets. That can be frustrating for unsuspecting heirs.

If the owner sells the business before he or she dies, the situation is different. Now, the owner will have to pay the capital gains on the appreciated value. So either way, there’s a big tax bill.

The complicating factor in all this is, will the business value remain constant after the owner sells it or dies? Some businesses are very owner-dependent. Those tend to drop in value once the owner is out of the picture. Other businesses have built in systems and automation, or are managed by other people who know what they’re doing, so the value is more assured.

But the point is, you may end up getting stuck with a tax bill for a business that isn’t worth as much as the government says it is.

This is why business succession is far from simple and is a frequent topic of interest for dramatic television shows. We recommend you seek the professional advice and council of someone who is an expert and specializes in such matters.

Inheriting an IRA – the Most Complex Scenario of All

The number of things that can happen, and that you can be required to do if you inherit an IRA or similar type of retirement account, could fill up a book. We will not attempt to get into any of these scenarios or details.

The main thing you need to know is, inheriting an IRA can put you in the position of being required to make decisions with what remains of the previous owner’s money.

If they were over 72, for example, you might have to take care of their final required minimum distribution. You might be required to liquidate the accounts within a certain number of years. You might owe taxes on it, and you might not. If you’re a spouse, a minor child, disabled, or a similar age to the person who died – there are different sets of rules for all these scenarios.

Get Help Managing Your High Net Worth Inheritance

If you have a sizable amount of cash coming to you soon or it has already arrived, hopefully, you are clear about the two main takeaways from this article:

1.Do nothing at first

2.Get help from a professional financial advisor or wealth manager

For help choosing the best advisor for your inheritance situation, we strongly recommend this free guide, The Ultimate Guide for Choosing the Best Financial Advisor for Investors with $10 Million – $500 Million Liquid Assets.

You simply will not find a better resource that spells out what to look for in a financial advisor, what to avoid, why the big banks will ultimately fail to deliver what you really need, common investment mistakes that even experienced investment professionals keep making, how to maximize your performance, and so much more.

There’s nothing else like this anywhere. We believe every person in the country, regardless of wealth, should read it. It’s that valuable.

But if you don’t want to wait and need to start interviewing potential advisors right away, why not start with us? We recommend interviewing at least three advisors or wealth managers. Make us your first, and then find two more and make your decision.

If you have an inheritance looming, now is the time to act.

Schedule a free call with an expert wealth manager

Authors

To be 100% transparent, we published this page to help filter through the mass influx of prospects, who come to us through our website and referrals, to gain only a handful of the right types of new clients who wish to engage us.

We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.

You see, our goal is to only accept 17 new clients this year. Clients who have from $5 million to $500 million in liquid investable assets to entrust us with on a 100% fee basis. No commissions and no products for sale.

More from authors.

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