So, You Just Received An Inheritance

Inheritances can be a complex and overwhelming matter to handle between the timing, structure, tax and planning implications for the beneficiary, and even whether would it be more beneficial to give up the inheritance. But let’s back up and start at the beginning.

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Any discussion of an inheritance usually comes as a heavily weighted conversation as it usually is preceded by the loss of a loved one. While inherited assets themself are often welcomed, it will not replace the loss that is associated with it and the financial implications are the last thing on your mind (and rightfully so). But because of the emotional fog you’re likely to be in while you deal with the stages of grief, I hope you have the opportunity to read this article before you actively deal with this situation as much of this will have time-sensitive considerations and below are the major questions that will need to be answered.

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Will The Inheritance Be Received Outright or In Trust?

This is why it is important to work with an estate planner when setting up these arrangements for your assets as they can advise on the structure of the inheritance, terms of various trusts, and the implications around how different assets are managed going forward. As for a beneficiary, the estate plan documents should be held by the executor or trustee of an estate and should be reviewed by an estate planning attorney.

Side note: retirement assets and insurance plans are often not included in a will or living trust and are directed through beneficiary designations.

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Tax Implications of The Inheritance

Depending on how many generations below the donor the asset is being passed to, there may be a generation-skipping tax levied, and this may change the strategy for how distributions are received. Assets such as stock receive a step-up in cost to fair market value upon the decedent’s passing. If a particular stock had a substantial increase in value since initially purchased, the beneficiary would have little, if any income tax liability if sold immediately upon receipt. The key to this is maintaining records of how the new cost basis is established.

There may be unintended tax consequences as well. Dividends, ownership in an LLC or partnership, or other streams of income could affect the beneficiary’s tax bracket or prevent certain deductions they previously qualified for.

If any assets are in a trust, it is equally important to know the formation of the trust to understand who will need to pay taxes on income earned by assets in the trust.

Disclaiming an Inheritance

If someone has amassed enough independent wealth where the inheritance will not have any positive effect on their financial position, they may elect to pass along their inheritance to another party.

Some examples of why and how this may be done are a parent passing along to a child or a wealthy sibling passing along to a sibling who has fallen on tough times.

What Comes Next

Once the dust settles and the most time-sensitive needs are appropriately handled, reviewing your estate plans to account for the newly possessed assets is best. Some concepts to consider at this stage are establishing trusts, electing additional beneficiaries, or considering charitable giving. No matter what direction you head in, the advice of the properly licensed professionals will be able to ensure that your loved ones with not have the burden of sorting out your estate when the time comes.