According to CNBC, an estimated $68 Trillion is about to change hands from Baby Boomers to their children. The greatest wealth transfer in history and it has started! Maybe you’ve already inherited some money. Maybe it’s going to happen in your near future.
This blog is designed to get you thinking about what to know about inheritances, including a brief overview of the tax rules, but mainly to get you thinking about how best to utilize this money to set yourself up for the future. So let’s start off with the basics:
The Executor of the estate will be appointed to gather and secure the assets of the estate. This person will either have been appointed by the deceased prior to death in a will or a trust, or will be appointed by a court judge and will begin the process of locating the deceased assets. This person will make sure all debts of the deceased are paid off and will be in charge of filing the deceased final income tax return. Unless you’re in this position, you won’t have much to do during this time.
Inheriting the assets
Once the executor has everything filed with the court, they will be allowed to begin the process of distributing the assets. Most estate assets fall into one of these buckets:
- Brokerage Account
- Retirement Account (Roth or Traditional IRA)
- Assets in a Trust
But what about taxes?
It’s important to know that each type of Asset that is inherited is treated very differently from a tax perspective. As an example, there are certain rules that govern the inheritance of a Traditional IRA that are different from the rules receiving a brokerage account. This is where a CPA or a Financial Advisor can come into play and give you guidance on how your inheritance is going to be treated from a tax perspective as well as a legal perspective.
Your goals should then determine how to best utilize this inheritance to set you up for your future.
So now what do I do?
I’ve listed a handful of ways to best utilize this money and will vary dramatically on your personal situation:
Spend it on an experience
You thought I was going to start somewhere else, didn’t you? Inheriting money is a great opportunity to Invest and get ahead. However, I would be remiss if I didn’t include the option to spend a portion of the money on an experience or traveling. It can be a great excuse to take your family on that dream vacation to experience a different place or a different culture. Life is all about experiences!
Pay off debt
A very common way to utilize inheritance money is to pay down debt. This could include anything from paying of Credit Cards and Car Loans, to paying down a portion or all of your mortgage debt. The decision may differ from what to do between high interest and low interest debt.
Invest towards retirement
In some circumstances, the money can be rolled directly into a retirement account for the recipient. However, most situations lead to inheritors to distribute money out of the deceased’s retirement accounts. This money can be used as a great way to begin funding your own retirement accounts moving forward including 401(k)’s, Individual Retirement Accounts, Roth IRA’s and so on.
This can be a great way to help fund your child’s education. The money could be used to supplement other education accounts, or fully pay for your child’s education to prevent them from taking out student debt.
An inheritance could now be a good chance to give you extra cash flow to complete that renovation. Or a good chance to finally diversify and buy that rental that you’ve always wanted to buy. Maybe you even inherited a property and now can make a decision on renting vs selling.
If you’re charitably inclined, or know that the deceased person you inherited the money off of was, then it could be a good chance to donate to a local charity.
So, I hope this got you thinking. Because there’s a good chance that you will receive some sort of inheritance in the future. And it’s up to you to make smart, sound decisions with your inheritance which may include one or a mix of the items above.
And if you need guidance how to best utilize yours, click the link below