Turning Fortune into Financial Freedom: A Beneficiary’s Guide to Handling an Inheritance

August 1, 2024

By Kirtland Financial Services

Estate Planning, Invested

Inheriting comes with many emotions, from sadness to confusion to perhaps even joy or relief. An inheritance can take various forms, such as cash, properties, stocks, bonds, property, or other assets. The person leaving the inheritance, the decedent, will likely specify how their wealth will be distributed through an estate plan or will at their death. If there is no will or estate plan, the law of the state where the decedent lived can determine how the property will be divided.

As a beneficiary, understanding what inheriting truly means and how to navigate the process is crucial. This guide provides beneficiaries with the necessary information to help them make informed decisions when dealing with inheritance matters.

Understanding Probate

First, it’s essential to understand that receiving an inheritance may involve going through a legal process known as probate. Probate is a court-supervised process to distribute the decedent’s estate to rightful beneficiaries. Sometimes, depending on state law, small estates may not require probate. If the decedent left a will and estate plan, the probate process may be simplified and move quickly. If no will exists, the estate’s assets will be managed and distributed through the court, which can take weeks or even months.

Dealing with Debt

The next step is dealing with inherited debts. Often, beneficiaries worry that they might be responsible for the decedent’s debts. However, you cannot inherit debt unless you were a co-signer, or the debt was in your name. The estate is mainly responsible for paying off debts, not the heirs.

Once the estate has paid off the deceased’s debts, the remaining inherited assets can pass to beneficiaries. Often, paying off debts is part of the probate process.

Estate Taxes

One of the most essential elements to consider is estate taxes. The decedent’s estate may owe federal estate tax if its value exceeds the exempt amount set by law. You typically do not owe estate tax as a beneficiary, but exceptions exist. Some states levy an inheritance tax, which could impact your inheritance. Therefore, it’s crucial to work with financial, legal, and tax professionals to understand the tax implications of inheriting before you make decisions about your inheritance.

Inheriting Investment Strategies

Learning the rules regarding inherited assets is essential if you inherit investments like stocks or bonds. You need to determine the cost basis for these assets, which impacts the amount of capital gains tax you may owe if you sell them. For tax purposes, the cost basis is from the date of purchase of the investment strategy until the decedent’s date of death. Once you inherit these assets, the cost basis restarts with you as the owner of these strategies. Getting advice from financial and tax professionals to help manage inherited investments effectively is beneficial, as cost-basis calculations can be complex.

As a beneficiary, you may face income tax implications if you inherit an Individual Retirement Account (IRA) or other retirement account. Depending on the type of account, you may have to take the required minimum distributions (RMDs) and pay tax on those distributions. Therefore, you should consult with a tax professional to understand the tax implications of inherited investment strategies.

Inheriting Real Estate

There are some specific factors to consider when inheriting real estate. If the property comes with a mortgage, paying it may fall on the beneficiary. Depending on the circumstances, you might choose to live in the house, rent it out, or sell it. Each option has implications that need careful consideration.

Record Keeping

Lastly, your responsibilities as a beneficiary continue once the estate has settled. You should keep detailed records of every transaction related to your inheritance, such as sale documents, appraisals, tax returns, and other relevant paperwork. Detailed recordkeeping can help avoid potential disputes with other beneficiaries or tax authorities.

In conclusion, being a beneficiary can feel overwhelming, but knowing what to expect can remove a lot of uncertainty. By understanding the probate process, tax implications, and handling of various inherited assets, you can make well-informed decisions for your financial future. Consider consulting financial, legal, and tax professionals to guide you through the complex process of inheriting.

Sources:

https://www.kiplinger.com/retirement/getting-an-inheritance-things-to-consider

https://www.newretirement.com/retirement/what-happens-when-you-inherit-money/

Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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Turning Fortune into Financial Freedom: A Beneficiary’s Guide to Handling an Inheritance

Understanding Probate

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