What to Do When You Inherit Money
If an individual left you an inheritance, what would you do? Most people would look at what they have received from the inheritance; if it’s a large sum, they might make an impulsive decision to buy something such as a new car, house, or a first-class vacation. Depending on the amount, some people may even be tempted to quit their job.
Many people focus on receiving one giant check and think about what they can do with that lump sum of money. For many people, the reality of inheriting money involves receiving the money in multiple payments over several years. Before you start spending, you may want to consider where your inheritance may make the most significant impact on your goals, such as a college fund or your retirement fund.
Tax Implications
When it comes to inheriting money, you also need to consider the tax implications of what you are receiving. How much of it will you need to give to the government?
As far as taxes go, “inherited assets receive a step-up in basis to fair market value at the date of the original owner’s death. Any gains from the sale of inherited assets are subject to the long-term capital gains tax rate” (per checkpointmarketing). When an individual sells an inherited asset, long-term capital gains tax, the difference is the sales price and the tax.
Certain states have an inheritance tax: “Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania” (American College of Trust and Estate Counsel).” The “Inheritance tax is a state tax on the receipt of assets from someone who died. For federal tax purposes, inheritance generally isn’t considered income” (per nerdwallet.com).
If you are planning your estate, you can avoid or reduce the amount of taxes on those who inherit your assets, per moneytothemasses.com:
- Make a will
- Place assets into a trust
- Make gifts out of excess income
- Donate to charity
Financial Goals
When you receive an inheritance, you must look at which financial goals the inheritance will help the most: retirement, your children’s private high school/college, mortgages, unpaid bills, credit cards, and personal loans.
You can also put the money into a CD or IRA to help plan for your retirement.
Rash Decisions
Your first instinct may be to go on vacation or buy a new house or a new car. Those are not necessarily bad ideas but consider your future and weigh the benefits of putting your money toward some of your big financial goals first.
Once the inheritance is gone, it is gone forever. The biggest mistake is to avoid “such rash and impulse buys” (per firstalliancecu.com).
So, what should you do when you inherit money?
You can see there is a lot to consider! So, discussing your options with your accountant or financial planner is a great first step.
It also is smart to keep it quiet when it comes to inheriting money. You could unintentionally attract unwanted requests for money from friends and family or get the attention of scammers.
Getting an inheritance can help you meet your primary financial goals if you look to the future when you decide what to do with it. Seek guidance from an expert and be thorough in your decision-making before you start spending.
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