Losing a loved one can be a painful experience. Even when expected, the finality of death can be difficult to comprehend. It’s no wonder that people who are grieving often feel overwhelmed and unable to process information with the same mental clarity that they have under more normal circumstances.
BRONWYN L. MARTIN
Adding financial decisions into the mix can further complicate matters. For many people, even the welcome news that they are the beneficiaries of a loved one’s estate can bring waves of sadness and uncertainty. If you are set to receive money or other assets from a loved one who has passed away, you may benefit from the counsel of a financial advisor, estate attorney and tax expert who can help you determine the best course of action to wisely manage the gift you’ve been given. Here are some factors you might want to consider with their help:
The form of the inheritance
First, consider the form of inheritance you received:
• Cash — if the assets you inherited are in the form of cash, there tend to be few complications. There is no federal tax on inherited amounts, though a handful of states do apply an inheritance tax.
• A life insurance settlement — if the deceased named you as a beneficiary of a life insurance policy, the payment you received is generally not subject to tax. You also may have the option to have the benefit paid out to you over a number of years rather than in one lump sum.
• A retirement plan — if you inherited an IRA or an individual’s workplace retirement plan, you will have 10 years to withdraw all of the money (this time limit does not apply to spouses or minor children). Failure to do so can result in a significant penalty. Taxes are due on distributions from traditional IRAs or workplace plans.
• Appreciated stock or other assets — if you inherited assets such as stock or real estate, the cost basis for the asset is stepped-up to the value at the time of the grantor’s passing. That can result in a major tax savings when you sell the asset.
Thinking it through
Particularly if you’re in a state of heightened emotion, don’t feel rushed into making decisions about what to do with the money. Slow down, seek advice and consider your options within the context of your overall financial situation and goals for the future.
If you were in a comfortable financial position before you received the inheritance, perhaps you’d like to spend some of the money on a family trip or to purchase a major item in memory of your loved one.
On the other hand, if you want to put part or all of the money toward funding your major financial goals, there are myriad ways to do so and honor the legacy of your loved one in the process. Perhaps you want to set up a 529 plan to help pay for your children’s college education in memory of the deceased. Alternatively, the money may be useful in making a down payment on a home or a cash infusion into your diversified portfolio that you’ll one day lean on in retirement. Whatever the case may be, consider working with a trusted financial advisor who can help you set it up in a with your long-term goals and financial plan in mind.
Expect bumps in the road
It’s not uncommon to experience some challenges or complications if an inheritance has arrived or is coming your way. This is all the more reason to consider consulting with a financial advisor, estate and tax professional to make sure you understand what you’ve received and how to best put it to work. They can bring a sense of clarity and calm that you may be in need of as you grieve the loss of your loved one.
Bronwyn L. Martin is a financial advisor and chartered financial consultant with Martin’s Financial Consulting Group, a financial wealth advisory practice of Ameriprise Financial Services LLC. in Kennett Square and Havre de Grace. She specializes in fee-based financial planning and asset management strategies and has been in practice for more than 22 years. To contact her: www.ameripriseadvisors.com/bronwyn.x.martin.