What to Do With an Inheritance

When inheriting assets from a loved one, it may be difficult to make important decisions about what to do with your inheritance. It’s an emotional time, and it’s important not to make hasty decisions about the assets you have inherited. Here are some tips that may help you manage your new inheritance. 

Questions to Consider When Inheriting Assets

When getting ready to receive an inheritance, it’s crucial to ask all the right questions. How will taxes and your financial priorities impact your plans? Do you need to modify your insurance coverage for inherited property? It may be overwhelming to think about now, but we can provide some answers to those questions to help you think through your plans.   

What Kind of Assets Are You Inheriting?

What you decide to do with your inheritance can depend on what assets are included. The value of assets in an inheritance can range from a few thousand dollars to several million dollars. An inheritance may contain:

• a lump sum of cash
• investments such as stocks, bonds or a retirement account
• real estate
• other assets such as jewelry, art, antiques or automobiles

While you may have been named the main beneficiary, your loved one may have also listed other beneficiaries. In this case, it’s important to determine what assets are yours before making any decisions. Additionally, your loved one may not have listed a beneficiary for their inheritance. In these cases, assets get automatically passed to a spouse or children as heirs. 

What Are Your Immediate Financial Priorities?

You may be experiencing a lot of emotions after losing a loved one, so you shouldn’t be making any impulsive decisions right now. One of the first things you should do after receiving an inheritance is to determine your overall wealth once you receive your new assets. Assessing your financial situation could help you make decisions on how you spend, give away money, decide to move or leave your job. 

If you have immediate access and control over your inherited assets, it will be easier to make hasty decisions. By slowing down and evaluating your next move, you can make smart decisions and potentially figure out what long-term goals you’d like to achieve with this inheritance. 

It’s possible that your loved one has unpaid debts that need to be taken care of. You may also decide that it is a good time to pay off your debt, add to an emergency fund or contribute to your retirement account. Maybe you have children about to reach college age and it’s a good time to set aside some funds for upcoming higher education costs. 

Having your financial priorities established and outlined can help you determine the best way to use your inheritance. 

How Will Inheriting Money Change Your Long-Term Goals?

After sorting out your immediate financial priorities, you can think about your long-term goals. Is it possible you’d like to save for your personal higher education costs? What about purchasing a second vacation home or traveling somewhere new? Maybe you have some college loans gaining interest that you’d like to pay off. If you receive a large inheritance that gives you a significant increase in net worth, it’s possible you may want to change your lifestyle. Working with a financial advisor can help you set financial goals, develop a financial plan and make the most of your inheritance. 

How Would an Inheritance Affect Your Taxes?

Different assets have different tax rules, and all these rules could potentially impact your finances.

Income taxes aren’t usually applicable to inherited assets, but any income that is generated from these assets may be subject to income tax. If any of your inherited assets produce a substantial amount of income, it’s possible your tax bracket may increase. 

This is also true when you inherit distributions from a retirement plan like an IRA. If it’s not inherited from your spouse, you’ll usually have tax liability. 

Additionally, all property, stocks or investments you inherit will have a market value on the date of the descendant’s death. Depending on the original purchase date, that market value can limit the capital gains tax you owe when you sell the asset. You must also factor in the increase in size of your estate as it may impact your estate taxes. 

What Changes Will You Need to Make to Your Own Estate Plan?

After receiving an inheritance, it may also be time to re-evaluate your own estate plan. It’s possible that the loved one that passed is one of your beneficiaries, and it may be time to update the distribution of your wealth if you pass. Making clear designations will help your loved ones distribute your assets, whether it’s a trust, a will or a life insurance policy. 

If the person you received the inheritance from was a beneficiary to your estate, you may also need to update documents like power of attorney, trustee, personal representative or medical power of attorney. 

Even if the inheritance isn’t large enough to have a sizeable impact on your estate, it could still be a good time to review your estate plan to ensure it reflects your wishes. 

How Will Your Insurance Needs Change?

When inheriting real estate, vehicles or valuable personal property, it may also be a good idea to review your insurance coverage. For example, if your loved one left you a house that you plan to keep, you will need to get with your insurance agent to make sure it is added to your policy along with any other newly acquired assets. You’ll want your new assets to be covered when the unexpected happens. 

Additionally, you may consider increasing your life insurance coverage to protect your loved ones in the future. Life insurance can be used for long-term care expenses, chronic illnesses, retirement and more. Increasing your life insurance policy can also be used to ensure future generations can afford to maintain that long-held family house your loved one recently left you.

A Financial Advisor Can Help

After losing a loved one, it can be an emotional time. Don’t make hasty decisions — reach out to your Farm Bureau financial advisor for guidance on how to manage your inheritance to meet your financial goals.