Inheriting assets can be a mix of emotions- grief, gratitude, and maybe even a little stress about what comes next. Whether you've inherited cash, real estate, retirement accounts, or something else, understanding how to manage it can make a big difference in your financial future. In this guide, I'll walk you through everything you need to know, including how to handle taxes, trusts, real estate, and retirement accounts.
1. The Tax Situation: Will You Owe Anything?
The big question many people have when they inherit something is, "Do I have to pay taxes on it?"
Cash and Investments: Cash itself isn't taxed when you inherit it, but any interest or dividends it earns once it’s in your hands will be taxed as income. If you inherit investments like stocks, bonds, or mutual funds, selling them might trigger capital gains taxes depending on how much they've appreciated since the original owner bought them.
Real Estate: Inheriting real estate is a little more complicated, but it can be to your advantage. When you inherit property, it usually gets a step-up in basis, which means it's valued at the fair market price on the date of inheritance. This can help you avoid paying capital gains taxes if you sell the property soon after inheriting it.
Retirement Accounts (IRAs, 401(k)s): If you inherit a retirement account, the rules depend on what kind of account it is and who you are to the decedent. For example, non-spouse beneficiaries now must take distributions from inherited IRAs and 401(k)s within 10 years due to changes from the SECURE Act.
2. What Happens When You Inherit a Retirement Account?
Inheriting an IRA or 401(k)? The rules around retirement accounts are different for spouses versus non-spouses. Here’s what you need to know:
Spouse as Beneficiary: If you're the spouse of the decedent, you have the option to roll the inherited account into your own. This means you can treat it as your own, continue contributing to it, and delay required minimum distributions (RMDs) until you hit retirement age.
Non-Spouse Beneficiary: For non-spouses, you can't roll over the account into your own. Instead, it becomes a beneficiary IRA and you must take distributions, and these are taxed as income if they're pre-tax assets. A Roth 401k or IRA would not be taxable. Thanks to the 10-year rule, you can choose when to take those distributions within a 10-year period, but the clock is ticking, and the tax hit can add up. So, planning is key.
Pro Tip: Consult with a tax professional and financial advisor to make sure you’re not hit with a huge tax bill when you take distributions from retirement accounts.
3. Inheriting Cash: It's Simpler But Still Important
Inheriting cash is one of the simpler things to deal with. However, it's still important to know how to manage it properly.
Taxes on Cash: Cash itself isn’t taxed, but any interest or dividends it earns after you inherit it will be taxed. Think of this as just regular income from savings or investments.
What to Do: It might be tempting to splurge with your new cash, but consider how it fits into your long-term financial goals. You might want to pay off any lingering debt, pad your emergency fund, invest for the future, or put it toward retirement. If you’re unsure what’s best, a financial advisor can help you make a plan.
4. Inheriting Real Estate: What’s Next?
Real estate can be one of the more complicated aspects of an inheritance. But if handled correctly, it could be a great opportunity for your financial future.
Step-Up in Basis: The good news with real estate is that you often get a step-up in basis. This means the property is valued at the current market price when you inherit it, which helps minimize capital gains taxes if you sell soon after.
Renting or Selling: You’ll need to think about whether you want to keep the property, rent it out, or sell it. Renting could provide you with income, but keeping the property comes with costs like taxes, insurance, and maintenance. Selling could be a great option, especially if you don’t want the hassle of managing it.
Tip: Work with a tax professional to figure out how to sell the property without taking a huge tax hit, thanks to the step-up in basis.
5. Trusts and Estate Planning: How Do They Work?
If your loved one had a trust, the terms would guide how assets are distributed. There are a couple of things to know:
Revocable Living Trusts: These are often used to avoid probate. If you inherit from a revocable living trust, the assets will typically pass directly to you without the need for probate court. This is great because it can speed up the process and keep things simple.
Irrevocable Trusts: If you're inheriting from an irrevocable trust, the rules are a bit different. You’ll likely need to work with the trustee to understand when and how the assets will be distributed.
Make sure to consult with an estate planning attorney to make sure everything’s handled according to plan.
6. What to Do With Other Inherited Assets (Cars, Jewelry, Art, etc.)
It’s not just about cash and real estate—you might inherit things like cars, jewelry, collectibles, or art. While these might have sentimental value, you’ll need to know how to manage them from a financial perspective.
Cars: If you inherit a car, you’ll need to transfer the title and make sure it’s insured. Keep in mind that if you sell the car, you might need to pay capital gains tax, depending on how much it has appreciated.
Personal Property (Jewelry, Art, etc.): High-value items like jewelry or artwork need to be appraised to understand their market value. If you decide to sell, you'll pay capital gains tax on any appreciation.
What to Do: Decide if you want to keep these items, sell them, or pass them on. Either way, make sure you know their market value to avoid any surprises when it comes time to file your taxes.
7. Common Questions for Young Inheritors
Will I Pay Taxes on My Inheritance? Inheritance is generally not taxed as income, but certain assets like retirement accounts, real estate, and investments can trigger tax consequences.
How Can I Avoid Common Mistakes? The biggest mistake people make is failing to plan for taxes or rushing into financial decisions. Take your time, and work with a financial advisor to help you make informed choices. Also, review your own estate plan after inheriting assets to make sure everything is aligned with your goals.
8. Practical Next Steps After Receiving an Inheritance
Step 1: Organize and Inventory Your Inheritance: Start by listing everything you've inherited-cash, property, retirement accounts, personal belongings. Knowing what you have will help you make a solid plan moving forward.
Step 2: Reassess Your Financial Goals: An inheritance can change your financial picture, so it’s a good idea to review your goals. Whether you want to pay off debt, invest in your future, or save for a big purchase, this could be a great time to make adjustments.
Step 3: Get Professional Advice: If you’re feeling overwhelmed, don’t hesitate to consult with a financial planner or tax advisor. They can help you make the best decisions for your situation and ensure you’re making the most of your inheritance.
Real-World Example: Sarah’s Inheritance
Sarah, 30, inherited a mix of assets from her late aunt, including $250,000 in cash, a rental property, an IRA, and some valuable jewelry. Here’s how Sarah handled it:
Cash: Sarah used the cash to pay off student loans and invest in a taxable brokerage account for her long-term goals.
Real Estate: She sold the rental property, benefiting from the step-up in basis, and minimized her capital gains taxes.
Inherited IRA: Sarah inherited a traditional IRA. She followed the 10-year rule, taking annual withdrawals to balance tax impact and allow the funds to continue growing.
Jewelry: Sarah sold her aunt’s jewelry after getting it appraised, using the proceeds to boost her retirement savings.
With the help of professionals, Sarah was able to manage her inheritance wisely and position herself for future financial success.
How WealthBound Can Help You Manage an Inheritance
Inheriting assets is a big deal, but it doesn’t have to be overwhelming. At WealthBound, we specialize in helping young professionals like you navigate the complexities of inherited wealth, taxes, and estate planning. Whether you’ve already received an inheritance or you’re preparing for one, we’re here to help you make the most of it.
Disclaimer: None of this should be seen as advice. This is all for informational purposes. Consult your legal, tax, and financial team before making any changes to your financial plan.: