You’ve received a sizable inheritance: Now what?

Tax Break for Elderly Caregiver(s) Receiving an InheritanceIt may be tempting to think of a sizeable inheritance you’ve recently received or will soon receive as “found money” that can be used at will. But it’s a good idea to have a strategy for receiving an inheritance unless your current financial plan guarantees that you’ll be able to achieve all of your goals comfortably.

Receiving an inheritance

Take time to reflect. You don’t need to take immediate action after receiving an inheritance. Instead, consider the inheritance’s impact on your financial condition, speak with dependable professionals, and carefully consider your choices. You may find that an accountant, attorney, and financial advisor can be extremely helpful in this situation. Place cash or investments in a bank or brokerage account while making plans. If you’re married, you might hold the assets in a separate account under your name. In a divorce, an inheritance is often your individual property. However, in combination with marital money in a joint account, it may no longer have that status.

Avoid making quick financial commitments. Only begin spending or make financial obligations based on your inheritance if the administrator still handles your loved one’s estate once you know your share of the estate’s net proceeds. The ultimate payment can be less than anticipated if all fees and taxes are considered. If you’re getting your inheritance through a trust, speak with the trustee. You’ll want to acquaint yourself with its provisions and ensure you comprehend the time, amount, and distribution requirements.

Beware of income and estate tax consequences. Although an inheritance is typically exempt from income tax, the assets you receive may affect your future tax obligations. For instance, some assets that generate income, such as those from real estate, an investment portfolio, or a retirement plan, may significantly raise your taxable income or even place you in a higher tax bracket. The inheritance can affect your estate plan, depending on its amount. Talk to your advisor about ways to lower taxes and preserve as much money as you can for your heirs if it raises the worth of your estate to the point where estate tax is a problem.

Financial planning

Review and revise your financial plan. Separating an inheritance from your other assets could promote irrational, unexpected spending. Integrating inherited assets into your entire financial plan is a better strategy. If you have credit card or other high-interest debt, consider using some of the inheritance money to pay it off or start an emergency fund. The remainder should be accessible with other assets to pay for your retirement, your children’s college costs, travel, or other financial objectives.

There is nothing wrong with taking a small share of a large inheritance and treating yourself a little. However, it would be best to approach inherited assets the same way you would treat assets you have earned over time and include them in a thorough financial plan. You should include any inherited property in your estate plan as well. Contact our RRBB accountants and advisors for further details.

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