How Should I Manage My Inheritance?

Inheritance
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An inheritance can be tricky to navigate, depending on the asset.

Some people are chosen to receive an inheritance.

Their loved ones created an estate plan and made a point to include them.

Others inherit by default because a relative died intestate.

According to a recent CNBC article titled “Receiving an inheritance? Here’s how experts say to handle any windfall,” both types of heirs must navigate what to do with the money or property received.

An inheritance should be handled wisely.
When an inheritance involves a home, the heir is responsible for maintenance and payments while deciding to sell, rent, or move in.

Although some people may inherit a fortune, this scenario is rather unlikely.

The University of Pennsylvania analyzed the data from a Survey of Consumer Finances by the Federal Reserve.

According to this survey, the average American inherited just over $12,000 between 2001 and 2019, regardless of income or age.

When those who received no inheritance were excluded from the results, American heirs averaged $184,000 in inheritances.

Although this is a significant amount of money, it will not lead to millionaire status or early retirement.

How an inheritance is handled can depend significantly on the asset type.

Investments, real estate, and cash are common assets for inheritances.

Of these, cash is the simplest to manage.

After all, cash is always the right color, fit, and fashion.

In 2023, federal estate taxes will not be required unless the inheritance from the estate exceeds $12.92 million.

Some states do levy their own inheritance and estate taxes.

Real estate is a bit more complicated.

If you received the asset as a gift while your loved one was alive, you will owe a capital gains tax bill for the appreciated value of the home when you sell it.

Inheriting the home when a loved one dies allows for a step-up in basis.

What does this mean?

If you choose to sell the property, the tax on the gains will only be on the amount the property increased in value from the date your loved one died.

Depending on how long the estate settlement takes, you may need to wait six to twelve months to sell the property.

A home can be challenging to divide between heirs.

If all siblings inherit the property, they may choose to rent the property, sell it and divide the money, or have one sibling buy the other shares and move into the property.

One of the first steps to take when an inheritance includes a home is to appraise the property as soon as possible.

You should get at least two appraisals rather than relying on a single opinion.

This number will provide a benchmark if you choose to sell the property or give a dollar amount for how much one sibling will owe the others to purchase their shares.

While waiting to decide what to do with the property, you are still responsible for upkeep, property taxes, mortgages, and maintenance.

Similar to real estate, investments in taxable accounts receive a step-up in basis.

If your parents purchased Apple Stock for $10, you will inherit the stock at its current value.

You can choose to sell and keep the cash or continue to hold the investment.

If you hold the investment, you will owe taxes on realized gains.

Retirement accounts are another complicated type of inheritance.

When someone not the spouse inherits an account funded with pre-tax dollars like a traditional IRA or 401(k), taxes must be paid when money is withdrawn from the account.

Those not spouses of the original account owner must withdraw all funds within ten years, with very limited exceptions.

Heirs in their peak earning years may have greater income tax liability.

Ideally, heirs would know when they are to receive an inheritance and would be a part of conversations for making a smooth transition.

Because this is not always possible, heirs should seek professional advice and plan to make wise financial choices with the gifts received.

Reference: CNBC (Oct. 16, 2023) “Receiving an inheritance? Here’s how experts say to handle any windfall”

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