Financial Education Series

Inheritance Planning

Preparing for and Managing Inherited Assets

Receiving an inheritance can be emotionally complex and financially significant. With proper planning and management, inherited assets can strengthen your financial foundation and honor the legacy of your loved ones.

Why This Matters

Inheritances often arrive during emotional periods and can involve substantial sums. Without proper planning, recipients may make hasty decisions, face unexpected tax consequences, or fail to integrate inherited assets into their broader financial plans. A thoughtful approach helps ensure these assets are managed in alignment with both your goals and the legacy intentions of the benefactor.

Before an Inheritance

Preparation Steps

Have Meaningful Conversations

While often difficult, discussing inheritance plans with family members can provide clarity and reduce future complications. These conversations can address expectations, values, and wishes regarding the disposition of assets.

Understand Asset Types

Different assets may have different transfer mechanisms, tax implications, and management requirements:

Financial accounts (retirement, brokerage, bank accounts)

Real estate and personal property

Life insurance proceeds

Business interests

Assemble Your Team

Identify professionals who can help you prepare for and manage an inheritance, potentially including a financial advisor, tax professional, and estate attorney.

Estate Document Fundamentals

Will vs. Probate

A will directs how probate assets should be distributed, but doesn't avoid the probate process. Probate is the court-supervised process of administering a deceased person's estate, which can be time-consuming and public.

Beneficiary Designations

Many assets transfer outside of probate through beneficiary designations, including retirement accounts, life insurance policies, and transfer-on-death accounts. These designations generally override provisions in a will.

Trusts

Assets held in properly structured trusts typically avoid probate and may provide additional benefits like privacy, tax planning, and control over how and when beneficiaries receive inheritance.

Managing an Inheritance

Initial Steps

Take Time to Grieve

Allow yourself time to process emotions before making major financial decisions. Except for immediate necessities, most financial matters can wait until you've had time to adjust emotionally and consider your options carefully.

Avoid hasty decisionsFocus on immediate needs only

Organize and Inventory

Create a comprehensive inventory of inherited assets, including account numbers, titles, statements, and estimated values. This documentation will help you assess the full scope of the inheritance and provide necessary information for tax planning and financial integration.

Document all assetsStore information securely

Understand Tax Implications

Different asset types have different tax treatments when inherited. While most inherited assets receive a "step-up" in basis to their value at the date of death (eliminating capital gains on previous appreciation), exceptions exist for assets like traditional IRAs, which remain subject to income tax when withdrawn.

Estate tax considerationsIncome tax treatmentState tax variations

Financial Integration & Long-Term Planning

Establishing Priorities

Create a Waiting Period

Consider implementing a self-imposed waiting period (often 6-12 months) before making major financial changes or large purchases. This helps prevent emotional decisions and gives you time to develop a thoughtful plan for the inherited assets.

Assess Current Financial Position

Before deciding how to use inherited assets, review your complete financial picture, including:

Emergency fund adequacy

Debt obligations

Retirement savings progress

Other financial goals

Honor the Legacy

Consider the wishes and values of the person who left the inheritance. While you may not be legally bound to use the assets in a specific way, many beneficiaries find meaning in allocating at least some portion toward purposes that would have mattered to their loved one.

Allocation Strategies

Balanced Approach

Consider dividing inherited assets among multiple priorities rather than allocating everything to a single purpose. A common framework is:

Set aside a portion for immediate needs or modest personal enjoyment

Allocate funds to strengthen your financial foundation (emergency fund, debt reduction)

Invest the remainder for long-term goals like retirement

Special Considerations for Retirement Accounts

Inherited retirement accounts have specific distribution rules based on your relationship to the deceased and the account type. For non-spouse beneficiaries of traditional IRAs, the SECURE Act generally requires complete distribution within 10 years, with some exceptions.

Titling and Ownership

Consider how inherited assets should be titled, particularly if you're married. Keeping inherited assets separate from marital property may be advisable in some situations for legal and estate planning purposes.

Special Situations

Complex Scenarios

Inheriting Illiquid Assets:

Family businesses require succession planning or sale considerations

Real estate may need management, renovation, or liquidation

Valuable collections might require appraisal and specialized selling

Consider tax implications before liquidating any assets

Family Dynamics:

Unequal inheritances can create tension between family members

Shared inherited assets may require formalized co-ownership agreements

Consider family mediation for complex situations

Maintain clear communication while respecting boundaries

This content is educational in nature and updated as of June 2024. We aim to relay factual financial information, similar to how a newspaper would report market data. For complete information about our services, please review our Terms of Service.