Financial Checklist: Receiving An Inheritance

Receiving an inheritance? Here are some financial considerations.

Over the past year, throughout the Covid-19 pandemic, our country has experienced a significant amount of deaths. According to the Johns Hopkins Covid-19 case tracker (link opens in new tab), as of April 2021 the US has experienced over 573,000 deaths from Covid. Those people leave behind loved ones who mourn their loss. And also, some of them leave behind assets that will be passed along to their loved ones through an inheritance.

5 Financial Tips When Receiving an Inheritance

Have you recently received an inheritance? Here are some things to consider.

1. Liquid vs Illiquid. Are the assets liquid, or illiquid? Liquid assets typically are assets with a ready market for being turned into cash. This means, accounts that already hold cash, like a bank account, or accounts that hold stock investments like a brokerage account or a retirement account. Illiquid assets are things like a home, a car, or a set of collectible baseball cards – these things must be sold in order to get the cash value from them, and finding a buyer might take some time. If you inherit a house, for example, you’ll need to decide whether to sell it or keep it (rent it out or move in?). If you want to sell it, you’ll have to figure out what to do with all the items inside the home (an option could be to have an estate sale and donate the remainder to charity) including those items that may have sentimental or actual value. You’ll also need to hire a realtor and make any repairs necessary to sell. During the time it takes for the home to sell, remember to keep up the curb appeal by mowing the lawn, cleaning the gutters, and paying the utilities – all of which could take away from any profits you earn from the sale.
2. Are you inheriting any retirement accounts? If you will be inheriting money in an IRA, whether a Roth or traditional retirement account, and your loved one passed away in 2020 or later, this account may be subject to inherited IRA rules that require all funds in the account to be withdrawn within 10 years of the date of death of the original owner, according to the SECURE Act (link opens in new tab). This is different from how the rules used to work, so be sure you understand how your account will be impacted.
3. Are you inheriting any assets that have appreciated in value? If so, you may be able to benefit from the step-up in cost basis that occurs with death of the original owner. This might sound like a complicated thing, so let’s discuss. Say your grandmother bought $100 worth of Apple at the original public offering on December 12, 1980 for $22 a share, so she owned 4.54 original shares. Over time, the stock has split so that when she died after its most recent split August 28, 2020, she owned 1,016 shares. Let’s say Grandma died on December 1, 2020, when the stock was worth $122.72 according to bigcharts.com. When she died, her original $100 investment was now worth $124,683.52. Normally, if you sell a stock that has appreciated in value, you owe taxes on the gain. In this case, however, upon Grandma’s death the shares receive a step up in basis which means that for you, it is as if the shares were bought at $124,683.52. So when you sell, you will only pay taxes on the gain above $124,683.52. It’s important to be aware of this so that you can prepare for any potential tax liability you might have when you sell the shares. Consult with your tax professional. This is not intended as tax or investment advice.
4. What do you plan to do with the inheritance? Now that you’ve received the inheritance, what is the best way to use it? How does it fit within your overall financial picture? Should you use it to pay down debt, like credit cards, student loans or a home equity line of credit? Put it aside for your future needs, like retirement? Use it as a down payment on a real estate purchase? Spend it on a new car or a fabulous vacation? These are all great questions that don’t have one simple answer. Talk to your financial advisor about the best option for you.
5. Do you have an estate plan of your own? Now that you’ve been through the experience of the death of a loved one, you can probably see the value in having a plan for yourself, in the event of your death. Having a will and estate plan in place can be an act of love towards those you care about, since you will have expressed your wishes clearly in your plan. Read more about estate planning for everyone here.

These are just a few of the practical considerations I talk to my clients about when they have received an inheritance.

Processing Emotions that May Come with an Inheritance

One other aspect to these considerations: the death of a loved one can come with a large amount of emotion. Let yourself process that emotion in a healthy manner. And remember that it’s likely your loved one would have wanted you to put your inheritance to its highest and best use. It’s up to you to figure out what that highest and best use is for you.

Every situation is different, so please talk to the financial professionals in your life before making decisions about how to handle your inheritance.