The death of a loved one is often emotionally challenging and can dramatically change your life. If your cherished family member or friend leaves you an inheritance, that gift, while thoughtful and appreciated, can make a difficult situation even more complicated.
We’ll share some guidance to help you manage your inheritance wisely so you can make the most out of your dearly departed’s legacy.
When someone close to you dies, you may experience many powerful and confusing emotions like anger, regret, sadness, and even relief. You may also have a hard time accepting their death.
No matter your feelings, you likely aren’t in the headspace to make big decisions. Therefore, you should wait until your mind and heart have more peace and clarity before choosing what to do with an inheritance.
Plus, depending on what you inherited, you may not be able to access the gift until probate is complete. Probate is a legal process that settles the estate of the deceased, which involves paying off outstanding debt (if applicable) and doling out bequeathed assets. Depending on the complexity of your loved one’s estate, it may take months, or even years, to resolve.
Some inheritance types don’t go through the probate process. For example, if you’re named as the beneficiary on a life insurance policy or payable-upon-death bank account, you can typically receive the funds quickly by submitting a copy of the death certificate to the insurer or financial institution. In that case, it’s wise to store the money somewhere safe and stable, like a high-yield savings account1 (be mindful of FDIC insurance limits), while you work through your grief.
When you think you may be ready to handle your inheritance, you should develop a clear plan before spending a cent or making any decisions. Here are some tips to guide the planning process.
You need to understand what you’ve inherited so you know what options are available. Below are some common assets you may inherit and what you can do with them.
Cash: Pay off debt, save, invest, donate, or spend
Real estate: Live in (if residential), sell, or rent out
Investments: Leave as-is or sell
Retirement accounts: Leave as-is, rollover into another account, or cash out
Valuable items (jewelry, art, antiques, etc.): Keep, sell, or donate
All of these options can make sense under certain circumstances. However, the best financial moves will depend on your unique situation.
Pro tip: Get (and stay) in touch with the estate’s executor so you can receive timely updates about your inheritance.
Now that you know what you’re working with, it’s time to take a hard look at your finances. Your inheritance will impact your future much differently if you’re living paycheck to paycheck and struggling under a mountain of debt than if you're living comfortably and actively building wealth.
For instance, if you have a negative net worth, you may want to use a cash inheritance to pay off debt and establish an emergency fund. You might also decide to keep and live in a mortgage-free home to lower your housing expenses.
On the other hand, if you have a higher net worth, you may decide to donate or invest any cash left to you. You might also choose to add your loved one’s home to your rental property portfolio.
In either case, think about what your loved one would want for you. They’d likely hope their gift helps you and future generations feel more secure. However, they might also encourage you to live a little on their dime by taking the vacation you’ve dreamed about for years.
Pro tip: Determine how your inheritance can help your life today and set you up for a more prosperous tomorrow.
You most likely won’t have to pay an estate tax because the federal government won’t charge one unless an estate’s value is over $13.61 million2. Similarly, you probably won’t be assessed an inheritance tax, though a handful of states may if you don’t meet exemption criteria.
However, many other inheritance types can still result in a tax bill. For instance, if you cash out a traditional individual retirement account (IRA), you’ll likely have to pay income tax on those funds. If you sell off investments or real estate, you may have to pay a capital gains tax.
The stepped-up basis is your friend. If you sell an inherited asset immediately, you won’t have to pay any taxes. If you wait and it appreciates, you’ll only have to pay tax on the difference between the value at the time of the sale and the value when your loved one died.
Pro tip: Generally, life insurance proceeds are not taxable.
Receiving an inheritance should trigger an evaluation of your own estate plan. You may need to update your documents if you inherited an asset you’d like to leave to your heirs. You might also need to name a new estate executor or beneficiary if your recently deceased loved one was listed in that role.
Losing a close family member or friend is a life-changing event that can make it challenging to think clearly. Receiving an inheritance (especially a significant one) can make this chapter even more confusing.
You may want to chat with a financial professional about your inheritance. That way, you can maximize its positive impact on your life, minimize the taxes you have to pay, and honor your loved one’s legacy.
1 FDIC: Deposit Insurance At A Glance
2 Estate Tax | Internal Revenue Service (irs.gov)
This article is provided for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
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