5 Actions to Prepare For Your Inheritance

A financial windfall might seem like something out of a movie — but for more and more Americans, it’s becoming a possibility. According to the Wall Street Journal, an estimated $61 trillion in wealth will be transferred to the heirs of older generations between 2018 and 2042. Below are a few recommendations that can help with preparing for an inheritance.

1.  Give Yourself Time to Process

Whether an inheritance comes as a surprise to you or you’ve been involved in a family member’s financial/estate planning, this type of wealth is often the result of a death in the family. Give yourself time to grieve the loss. A financial windfall as the result of a lost loved one can stir up complicated feelings, and that’s okay. Don’t assume that you have to instantly make a decision about this money — it’s important to take the time to think about what you truly want to do with it.

2.  Assess Your Financial Position and Goals

Even a modest inheritance can significantly alter your financial position. Take a step back to look at your complete financial picture. Perhaps you want to use your inheritance to retire from work, pay for your children’s college education, buy a bigger home or buy a new car. Whatever your priorities are, take an honest look at your finances and think about how your inheritance can help you achieve your personal goals. You may be able to significantly boost your retirement savings and save more in taxes each year with good tax planning, while still having enough for a splurge purchase, like a family vacation.

3.  Understand the Tax Implications

The tax regulations surrounding inheritances can be confusing, and some tax implications vary by state. Depending on where you live, your inheritance may be subject to an estate tax as well as an inheritance tax:

  • Estate tax: This is a federal tax based on the value of a person’s assets when they die. Estate taxes are only levied on estates valued at $12.06 million or more as of 2022. Several states also impose a separate state-level estate tax. As of this year, 13 states have a separate estate tax on top of the Federal estate tax.
  • Inheritance tax: Inheritance taxes are charged to the heir, not the decedent. As of 2022, only six states levy a separate inheritance tax:
    1. Iowa
    2. Kentucky
    3. Maryland
    4. Nebraska
    5. New Jersey
    6. Pennsylvania

Note: Nebraska’s Inheritance Tax is County-based and not a statewide tax.

In some cases, closely related heirs are exempt from state inheritance tax.

While some inheritances do not incur an income tax – for example, if you are eligible for a spousal rollover –  there are no income taxes due until the spouse reaches the required beginning date. If you take the IRA as an inherited IRA, there are no penalties on withdrawals even if the spouse is under 59 1/2.  If you do not withdraw the required minimum distribution from the IRA each year, you may be subject to a tax penalty. Other inherited assets may be subject to capital gains taxes. Because these taxes can significantly affect your estate, it’s best to talk with a financial advisor like myself who has expertise in tax planning.

4. Partner with a Certified Financial Planner™ Professional

If you aren’t working with a Certified Financial Planner™ already, now is a good time to utilize their expertise. Seek out a fee-only fiduciary CFP® Professional who can help you manage your newly acquired wealth and help you leverage your inheritance to achieve your own financial goals. At this time, you could use several advising services, including but not limited to:

  • Estate planning: You may want to set up a trust or plan ahead to minimize estate taxes for your beneficiaries.
  • Tax planning: An inheritance can have complex tax implications, but an advisor may be able to help you minimize your tax burden.
  • Asset analysis: An inheritance may include money, property, investments, or other assets. Your advisor can help you understand how the inheritance affects your net worth.
  • Insurance Analysis and Planning: A financial advisor can help you assess your new wealth and counsel you on life insurance needs.

5. Avoid Procrastination: Ask for Help Planning for an Inheritance Today

If you aren’t sure how to prepare for your inheritance, the independent, fee-only financial advisors on the Hadary Team at Moneta can help. As a registered investment advisor (RIA) firm, our team is committed to helping you achieve your goals with transparent, time-tested guidance and advising services. To learn more, contact the Hadary Team at Moneta.

© 2022 Moneta Group Investment Advisors, LLC. All rights reserved. Moneta Group Investment Advisors, LLC is an SEC registered investment advisor and wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax, or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

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