While getting an inheritance may appear to be a wonderful experience, studies reveal that nearly one-third of Americans who inherit money lose it within two years. You may avoid the same tragedy by working with an expert Wealth Advisor to develop a strong strategy. To optimize the value of your inheritance for your family’s future, you’ll need to examine some difficult concerns, such as tax benefits and estate ramifications. Here are a few things to think about if you get an inheritance
What To Do With an Inheritance: Before You Begin
Receiving an inheritance from a family member should be regarded positively. But, all too frequently, it turns into a curse. Here are some ideas to help you maximize your inheritance.
#1. Slow down.
Here’s how it works: When a loved one passes away, you are unable to make sound financial decisions. However, in most circumstances, you do not need to make important decisions immediately away. There’s nothing wrong with letting your inheritance sit while you mourn.
Work with a professional to handle market turbulence, inflation, and your future.
If you received a lump sum of money, it is fine to keep it in a money market account for a few months. Take a long, deep breath. Allow yourself some time to mourn. When you’re ready, you may concentrate and establish a strategy for your inheritance.
#2. Remember Their Legacy
It’s vital to remember where your inheritance came from as you choose what you want to do with it. Consider all of the effort and sacrifice that went into making that inheritance possible. We’re discussing a person’s legacy here!
Ask yourself, “Will this decision honor the memory of my loved one?” Keeping it in mind will instill a sense of duty, accountability, and purpose in the circumstance, allowing you to make the most use of your inheritance.
#2. Create a Dream Team
If you obtain a financial windfall, such as an inheritance, don’t be surprised if all kinds of individuals appear out of nowhere to tell you what you should do with it.
That is why you should put together your own “board of advisors”—a dream team of highly experienced individuals who can guide you through the inheritance process. Depending on the type of inheritance you receive, you may need to seek advice from a professional such as a
- Certified public accountant (CPA) or a tax expert.
- Insurance broker
- Investment professional
- Estate planning attorney
- Attorney at law for taxation
- Real estate broker
Keep in mind that these individuals are not there to tell you what to do. They should be teachers who will sit down with you, explain all of your alternatives, and guide you as you make the best decisions for you and your family.
What Can You Do with an Inheritance Money?
Your financial situation and personal circumstances will determine what to do with inheritance money. A beneficiary who is in debt may be able to gain some financial breathing room. Another parent may be able to save for college. When it comes to inheriting money, there are various choices to consider. Knowing your financial objectives might help you decide “What should I do with my inheritance?”
#1. Pay off your debts
A recipient who has high-interest debt, such as credit card debt, may wish to consider paying it off with a cash inheritance. With the average credit card interest rate currently at 20.2%, according to Bloomberg, this can result in large savings, and debt elimination can bring peace of mind and free up budget space.
#2. Increase the size of your emergency savings.
The majority of experts think that having enough in a savings account to cover six months of spending is a decent place to start when building an emergency fund. A monetary inheritance might be used to start or contribute to an emergency fund.
#3. Put money aside for retirement.
A monetary inheritance might help a beneficiary build a nice nest egg for retirement. Using the cash to max out retirement accounts, such as a Roth IRA or a 401(k), can help lay the groundwork for a secure financial future. The maximum amount that can be donated to an IRA is $6,000 if you are under the age of 50, and $7,000 if you are 50 or older. A 401(k) contribution limit is $20,500 for those under the age of 50 and $27,000 for those over the age of 50.
Receiving a substantial inheritance may free up funds in a person’s budget to make additional retirement contributions in order to fully fund their accounts.
#4. Invest
Investing inheritance money gives the beneficiary the opportunity to save for the future. Individual equities, ETFs or index funds, mutual funds, cryptocurrencies, and real estate are all viable investment possibilities. A beneficiary may also seek the assistance of an investment advisor.
#5. Put money down for your children’s future.
A parent who receives a monetary inheritance may choose to set aside funds for their child’s future costs, such as college tuition. Opening a 529 college savings plan allows a parent to save for future tuition and fees, housing expenses, books, and supplies, meal plans, and other eligible expenses for their child’s college or vocational training.
#6. Safe housing
Using an inheritance to pay off a mortgage, save for a down payment, or purchase a home can assist reduce rising housing costs. Having a stable place to live can allow you the freedom to pursue other aspirations and goals.
#7. Remember a loved one.
Receiving an inheritance can be a bittersweet experience. Using the monies to honor a loved one may aid in the healing process. Take a trip in their honor, designate a scholarship in their honor, attend their favorite sporting event, or have a tree planted in their honor.
How to Invest an Inheritance
You may be looking for methods to invest the money you’ve received after you’ve exhausted the contribution restrictions for your tax-advantaged retirement accounts, such as a Roth IRA and a 401(k).
Here are two methods for doing so:
#1. Good Growth Stock Mutual Funds
Using an individual or joint taxable brokerage account, invest in solid growth stock mutual funds. While these accounts do not provide the tax benefits that traditional retirement accounts do, there are no contribution restrictions and you can withdraw money at any time (without penalty), which is a positive!
But keep in mind that you should never invest in something you do not understand. That is why you should always consult with a reputable investment advisor who can walk you through all of your alternatives.
#2. Cash Purchased Real Estate
You may be able to buy a rental property outright depending on the size of your inheritance. But hear us out on this: if you don’t have enough money to buy a rental property in cash, don’t buy it. Borrowing money for a rental property is never a good idea. If you have some extra cash, talk to a real estate specialist about finding a terrific deal with a lot of earning potential.
What To Do With a House Inheritance?
If you inherit a house, you have three alternatives, just like if you inherit money: sell it, rent it out, or dwell in it.
#1. When You Inherit a House, Sell It
When someone inherits a house, it is usually worth more than it was when the original owner purchased it. If that’s the case, you’ll get a step-up in basis to help you save money on capital gains taxes if you decide to sell the house.
Let’s say your mother’s house was worth $175,000 at the time of her death. The worth of the home at the time she died becomes what you “paid” for it for tax purposes—this is the stepped-up tax basis.
So, if you decide to sell the house immediately away and it sells for $175,000, you won’t have to pay any capital gains taxes on it. However, if you sold it a year later for $200,000, you would only have to pay capital gains taxes on the $25,000 difference between the selling price and the home’s value when you inherited it ($175,000).
We understand that’s a lot to take in! If you’re feeling confused or overwhelmed, we recommend reaching out to our RamseyTrusted experts. Our network of tax advisors and real estate professionals can assist you in determining what to do with an inherited residence.
#2. Rent Out Your Inherited Home
Renting out your home could be an additional source of income for you and your family, as well as a fantastic opportunity to save, pay off debt, and invest for retirement. However, there are certain drawbacks to renting out a house! The regular upkeep and repair, as well as the more complex taxes, may prove to be more headache than it’s worth. You must also select if you will maintain the property yourself or employ a property manager to do so.
Discuss your alternatives with a real estate professional who can advise you on what is best for your situation. In any case, don’t base your decision purely on emotion.
#3. Live in an Inherited House
If you inherit a paid-for house and elect to live in it, you will have no mortgage payment. That means you can make significant progress toward your financial goals with that extra cash!
However, keep in mind that moving into an inherited home entails taking on the financial responsibility that comes with owning. It is your responsibility to repair the air conditioner if it breaks in the middle of summer! Not to mention that as the new owner, you will be responsible for paying property taxes. If you don’t already have a good emergency fund, save aside three to six months’ worth of spending to meet any unexpected bills.
Another item to consider: If you reside in the house for at least two years, you can sell it and profit up to $500,000 ($250,000 if you’re single) without paying capital gains taxes.4
What Should I Do With My Inherited Car, Antiques, Jewelry, and Other Items?
Inheriting a large sum of money or a home may require major decisions, but deciding what to do with all the extras, such as dad’s baseball card collection and mom’s favorite jewelry, can be even more difficult.
Decide which items you want to keep and then look for ways to sell the remainder online or at an estate sale. Estate liquidation agencies may alleviate the stress of removing undesirable artifacts by inspecting what you have, issuing a check, and carting everything away in a matter of days. You might also contribute furniture, clothing, and other necessities to individuals in need.
What About Estate, Inheritance, and Other Taxes?
Okay, things really get tricky when it comes to inheritance taxes, but bear with us here.
The federal estate tax is a tax imposed on the transfer of a person’s property after death. In 2022, the federal estate tax is only levied on estates worth more than $12.06 million.5 In 2023, the figure rises to $12.92 million.6
You are not liable for estate taxes as an inheritor; your loved one’s estate is. Even if the estate is liable to estate taxes, as an inheritor, you don’t have to worry about them because they are collected before the inheritance is given to you.
Inheritance taxes, on the other hand, are a different situation. These taxes are levied once you inherit the assets of a loved one. Although there is no federal inheritance tax, six states do.
However, even if your loved one lived in one of those six states, many beneficiaries, such as husbands, wives, children, and grandchildren, are free from paying inheritance taxes.7
When it comes to taxes, it’s easy to get far over your head. As a result, you should include a skilled tax specialist on your dream team. Connect with a tax professional in your region if you want reliable help.
Conclusion
It’s a good idea to develop a strategy for how you’ll handle your inheritance before spending any of it. Creating an emergency fund, paying off high-interest debt, saving for retirement, saving for children’s education, and purchasing personal luxuries are some options. While you won’t have to pay taxes on your inheritance, the funds’ earnings will. As a result, tax-advantaged investments, as well as inflation hedges, may be appealing to newly rich heirs.
- TAXES ON INHERITANCE: What It Is & How It Works
- INHERITANCE FUNDING: What It Is And How It Works
- 7 Ways You Can Avoid Death Taxes
- INHERITANCE TAX: Overview & Threshold Explained
- Estate Tax Return: Understanding Requirements & Best Practices
References
