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What to Do When you Receive an Inheritance

Updated: Aug 16, 2023

Some estimates suggest that up to $36 trillion will transfer to the next generation through inheritance in the coming decades. If you are someone who has had a loved one pass and find yourself receiving an inheritance, here are the things to know.

The first thing you need to understand is the types of assets you are inheriting. If it’s “hard assets” like real estate, houses, or personal belongings it will likely receive a “step-up in basis” eliminating most or all taxation. There are a couple of Investment Accounts you need to understand, the first being non-retirement accounts. Non-retirement accounts will likely also receive a “step-up in basis,” resetting the capital gains to zero at the date of death and eliminating most or all taxation to the heirs. The only taxes owed would be on any growth of the investments following the date of inheritance. If parents bought a stock at $10 but the stock had grown to $20 on the date of their passing, the capital gains basis resets to $20 when you receive it. Essentially the IRS missed out on the capital gains taxes on the growth from $10 to $20. However, if the stock continues to grow to $25 before you sell it, the capital gains would be calculated as $25 minus the $20 for $5 worth of taxable gains. The second account you need to understand is Retirement Accounts. Roth IRAs and Roth 401(k)s: Typically pass tax-free to heirs but have to be withdrawn within 10 years by the beneficiaries. Traditional IRAs and 401(k)s: This is the one heirs need to be CAREFUL with. When distributions are taken out of the account, they will be taxable as ordinary income to the recipients. Additionally, with new rules that recently came into effect, the account now needs to be emptied within a 10-year timeframe.

Where are the assets? Are the assets in a trust? If so, when will you receive them? For any assets held in a trust, they will be distributed based on the trust document. This may mean there are restrictions, based on age, annual limits, etc. Trusts appoint a trustee, which could be a person or a “corporate trustee” like a lawyer or trust company. The trustee will be able to tell you what distributions may look like. For assets not held in trust, a will guide the distribution and division of assets. What's the overall value of the estate? For most people receiving an inheritance, the estate tax is not something that needs to be worried about. Current exemptions are over $11,000,000 per person, meaning for a married couple, they can pass over $22,000,000 to heirs tax-free.

Most importantly Make a Plan for What You Inherit. The person who you are receiving the inheritance from likely wants you to spend it smartly. Too many people are ruined by inheritances. Receive a large lump sum of money, only to waste the money in a short span of years. People let their lifestyle creep up, spending goes up, and then the money runs out. Instead, think about what the parents, grandparents, etc would have desired you to use it on. It’s ok to enjoy it, but make sure you use it to better your future A $250,000 inheritance for someone at age 50, could produce nearly $45,000 a year in retirement income if it’s saved and invested correctly.

Lastly, you need to Update your Personal Estate Plans. It's a good time to look at your estate plans. Is a trust needed to provide more direction on distribution? Make sure your wills, power of attorneys, and health care directives are updated.

If you have any questions, we are happy to help. Please contact us here or visit our website for more information.


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