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What to Do When You Inherit Wealth

By Fairport Wealth

Make the Most of Your Inheritance

If a loved one has remembered you in their will, you can honor their memory by deploying the assets you’ve inherited towards achieving your financial goals.

What you do with it may depend upon your life stage and situation. For example, someone just starting out might use it to pay off student loans or create an emergency fund. New parents may opt to create educational savings accounts for their children. An entrepreneur may finally be able to launch the business she’s been planning. Or a pre-retiree might invest it to provide added security in retirement.

However, what you do with your inheritance also depends upon the assets you receive, such as:

A home. When you inherit a home, you have the choice to live in it, rent it, or sell it. Your decision might be based on the home’s location and value, condition, cost of upkeep, real estate taxes, whether you are the sole or a partial owner, and most importantly, whether you need the home or need the cash. Keep in mind that if you choose to sell, you benefit from the step-up in basis, which means that the capital gains you owe are based on the profit above the home’s fair market value at the time of the inheritance, not the original purchase price.

Collectibles. Art, antiques, jewelry, or coin/stamp/baseball card collections may be highly valuable or primarily sentimental. A professional appraiser can help you determine its true market value. If the appraisal reveals a collection of significant worth, you may want to get it insured. And should you decide to sell, your cost basis is its value at the time of inheritance.

Retirement assets. Inheriting retirement assets can be complicated as there are many rules to follow based on the type of account it is, your relationship to the account owner, and whether the account owner had already started to take distributions. A general rule of thumb is to keep earning tax-free growth when you can. However, you may need to take Required Minimum Distributions or liquidate the account over a specified number of years, based on the  IRS rules which were updated by the 2019 SECURE Act.

Taxable investments. Socks, bonds, and mutual funds also benefit from the step-up basis. When you sell, you pay capital gains on the profits based on the fair market value on the day of original accountholder’s death. And these assets can be integrated into your own wealth plan.

Life insurance. The proceeds from a life insurance policy are generally not subject to income tax (although they are considered part of the estate for the purposes of determining any estate taxes) when taken as a lump sum. However, if you choose to receive payments as installments, you may owe tax on the interest. And these assets also can be included in your wealth plan.

Inherited wealth can help you live life with intention and achieve your long-term goals. A Luma Wealth advisor can help you make your loved ones proud by making the most of what they left you.