Smart Decisions for Handling an Inheritance

In my work with family stewards and especially with young people who have just received an unexpected inheritance, one of my most important jobs is coaching the recipients through the process of receiving and positioning the assets strategically. For many young inheritors, this is the first time they’ve ever had to make decisions about large sums of money, and the prospect can be overwhelming. However, there are a few basic facts and steps that can make everything go more smoothly—and can also save on expenses and taxes incurred on the inherited wealth.

  1. Get familiar with the documents. This is Estate Planning 101: the will—or, in some cases, the trust documents—govern how the assets will be distributed. When there is no will or other estate planning document in place, things get much more complicated, and the legal costs for settling the estate and making final disposition of the assets rise dramatically. Yes, you should obtain the services of an estate planning attorney, especially if the bequest is extensive, but you should also be familiar with the broad outlines of the will. Having this knowledge going in will make everything much easier.
  2. Know your cost basis. Let’s say that your parent passes away, and their will stipulates that you will receive stock they owned. Let’s also say that they bought the stock years ago, at a price of $20 per share. Today, however, that stock is worth $150 per share. Current estate law provides what is called a “stepped-up basis” for your cost; your ownership is set at the price of the stock when you inherited it: $150 per share. The same would be true of any real estate or other tangible asset that you inherit. This is important, because the assets you inherit may not necessarily be appropriate for you to continue owning, long-term. For example, suppose you have inherited a commercial property that is located in another state. Unless you want to be in the interstate property management business, you may wish to sell the property and reallocate the proceeds into a different type of investment. Because your cost basis upon inheriting the property is set at its value upon the death of the testator (the person who made the will), you could possibly sell the property without incurring much, if any capital gains tax. IMPORTANT NOTE: the Biden administration, as part of its tax plan, is said to be considering changing the laws to reduce or eliminate the stepped-up basis of inherited assets in certain situations. If you are a potential heir to an estate of any appreciable size ($1 million or more), you should take careful note of any pending legislation in this area.
  3. Retirement accounts. A retirement account can be bequeathed by means of naming a beneficiary, much like an insurance policy. If you inherit a retirement account (IRA, 401K, or 403B) from someone other than your spouse, you should roll the assets into an inherited IRA account. After you’ve done that, you will have ten years to take full distribution of the assets, allowing you to spread the tax burden out over as many years as possible, and even if you’re younger than 59 ½, you won’t be subject to the 10% early withdrawal penalty. If the inherited IRA was from a Roth account established at least five years before the grantor’s death, you also won’t have to pay taxes on the required distributions.

I work with family stewards and others who want to maximize the benefit of family wealth for themselves and future generations. To learn more about why it’s critical to have a trusted advisor guiding your estate planning strategy, click here to read my white paper, “The Fiduciary Standard and the Individual Investor.”


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