The gift of an inheritance is often an unexpected surprise from a loved one who has passed before us. This unique gift is something many will spend without forethought, but with a bit of planning and self-discipline, your gift can have a lasting positive effect on your life.
Beyond gratitude, you ponder what exactly you should do with it. At Integrated Wealth Management, we promote good stewardship with our finances. But at the same time, we want you to live your life to the fullest. And there’s no doubt, extra money can bring about added enjoyment.
But without a plan, you can wind up wondering where your gift disappeared to. Here are a few facts to keep in mind along with ideas on how to put your inheritance to work for your future.
Rules & Regulations Related To An Inheritance
Rules for the types of accounts may vary based on the state you live in, for example, a cash bank account and retirement account such as an IRA may have different impacts on the estate or inheritance tax. The rules for other assets such as real estate, personal property, and life insurance may also differ from location to location. While the liquidity of an inheritance will vary from person to person, it’s important to know the true value of your inheritance is most often associated with the Fair Market Value (FMV) of the property on the date of the decedent's death.
Due to the wide range of circumstances associated with gifts and inheritances, we simply can’t outline all scenarios. But with a few basic concepts in mind, you’ll be prepared to review your inheritance with an educated eye.
Familiarize yourself with the difference between an inheritance tax and an estate tax. The rules governing a state inheritance and/or estate tax vary greatly from state to state. Some states impose both. Others have one or the other, and a few select states have neither. In Delaware, we’re fortunate to be a state with neither inheritance nor estate tax. Beware, Delaware counties, New Castle, Kent, and Sussex, each imposes a probate fee based on your domicile, location of assets, and the value of a probated estate. We will cover this in a seperate blog due to its complexity.
An inheritance tax is a state tax imposed on the value of the inheritance and paid by the beneficiary. A federal inheritance tax does not exist.
An estate tax is imposed on the value of the estate and is collected from the decedent's estate; meaning the estate is taxed prior to inheritance distribution. An estate tax can exist at the state and federal level. Only large estates with a value greater than $11.7 million are assessed a federal estate tax. As of the writing of this blog there is legislation to lower the estate tax starting level from the current $11.7 million so stay tuned for future posts as the bill works its way through Congress.
Also, if you sell your new asset for more than FMV when you inherited the property, you may be liable to pay capital gains taxes to both the state and federal government. With these basic principles in mind, you can gain an understanding of the true value of your inheritance.
Putting Your Inheritance To Work
For the purpose of this article, we’re reviewing options for clients who inherit cash or decide to sell their inherited asset. The following is an overview related to Integrated Wealth Management’s guiding principles for clients who receive unexpected money. Based on your current financial position the first steps might not apply.
Pay off debt
Eliminating debt can be life-changing. Freeing up funds each month can boost your savings and improve your quality of life. Remaining diligent and avoiding increasing your level of consumer debt will help you gain the lasting effects of debt elimination.
Build an emergency fund
At any given time, we recommend you have the ability to cover 6 months’ worth of family expenses without dipping into accounts that would impose a penalty for early withdrawals.
Whether you encounter a true emergency or not, having these savings will bring lasting peace of mind.
Invest for the future
Max out an IRA, contribute to a child's college savings, bump up your investment portfolio. You certainly have options, but with time, you can expect to see your inheritance grow if you invest wisely. Depending on your age, risk level, and rate of return, you may see your inheritance grow significantly in a relatively short amount of time.
While results are not guaranteed — using the Rule of 72, you can quickly estimate how long it will take to double your money. Take 72 divided by the expected rate of return (we’ll use 10% for easy math). 72 ÷ 10 = 7.2, meaning you can expect to double your money every 7 years if you receive a 10% annual return.
If time is on your side, even a relatively small inheritance can have a big impact.
Treat yourself
Remember when we said we want you to live life to the fullest? Well, we meant it! We believe in the benefits of financial freedom, as clearly noted by our first 3 suggestions. But, whatever path you select, we understand your desire to enjoy life.
Integrated Wealth Management wants to help ensure that your inheritance plays a role in securing your future and enhancing the present. Knowing your inheritance came from someone who likely wants the best for you and your happiness, you should feel no shame or guilt in devoting a piece of the pie to fun.
Seek Wise Counsel
Receiving an inheritance may put you in the spotlight, especially if it was expected. You may receive many questions and your share of unsolicited advice. For these reasons, it’s important to take your time and truly consider your options on how to best allocate your new resources.
It’s smart to review your inheritance with an accountant. This will assure you understand the true value of your inheritance and help minimize taxes. With this knowledge in hand, you will also benefit from the guidance provided by a financial advisor.
At Integrated Wealth Management, our team consists of both CPAs and CFPs. Burt Hutchinson and his team of certified professionals can help empower you to make decisions with confidence when it comes to your inheritance.
We’re a fee-only firm. No commissions means our advice is always suited to serve our client’s best interest ahead of our own. Schedule a free consultation to ensure you get the most out of your inheritance.