Receiving an inheritance can come with some complicated emotions. On one hand, you have received a sum of money that might give you a lot of added financial freedom and ability to pursue your goals. On the other hand, you’ve likely just lost someone near and dear to you. This mix of emotions resulting from this circumstance can make planning for how to invest your inheritance complicated. Here are some steps to consider if you inherit cash, retirement accounts, non-retirement investments, businesses, and properties.
Cash Inheritances
If you have received a cash inheritance, then your first objective should be to figure out what your financial goals are. You may want to get rid of debts, work less to spend more time with loved ones, go back to school, start a business, donate to charity, buy a home, travel around the world, fully retire, or invest it for longer term growth. It is important to identify these goals and plan for each.
Goals-based planning gives you a north star to guide your choices. The what of investing (stocks, bonds, real estate, and others) is not as important as the why (financial independence, college funding, major purchase). Setting and monitoring goals helps you meet them with intention.
So, take some time to rest and reflect. What does financial security look like to you?
Inherited Retirement Accounts
The treatment of inheriting retirement accounts has changed significantly over the years. The new Secure 2.0 tax law has simplified transition of non-spousal beneficiaries of retirement accounts to ensure that assets must be distributed over the course of ten years. Spouses who inherit retirement accounts have the option to treat the retirement account as their own and not be subject to this ten-year rule.
If you are a non-spousal beneficiary inheriting an IRA and still earning an income yourself, you may be shifted into a higher tax bracket for those ten years of distribution. For example, if you inherited a $1,000,000 IRA, you would be responsible for taking, and paying income taxes on, about $100,000 per year on top of your regular income.
While you are not able to contribute funds from inherited retirement accounts into your own retirement account, the additional funds might give you more ability to maximize your retirement savings and tax deductions if you are still working. Just keep in mind that contributions are limited to the regular IRS limits.
Inherited Investments
Because stocks receive a step-up in basis upon death, many people will hold onto a concentrated stock position until they pass on. This means that if Grandma had some hypothetical* XYZ stock that she bought for $1,000 and dies when it is worth, say, $1,000,000, you will not have a taxable capital gain if you sell the stock for $1,000,000 after inheriting it. When I speak with people in this position, I find that they have a harder time thinking about their own financial goals and think more about how Grandma might have wanted them to keep the stock.
In truth, Grandma was in a much different position than you are. When assets are subject to significant capital gains, the potential tax hit can make it less and less attractive to sell over time. Grandma might have paid significant capital gains taxes upon sale, depending on which state she lives in. Of course, you would need to consult and work with your own qualified tax professional about your set of needs and circumstances, but, as an inheritor of stocks, you may be able to liquidate without a tax hit and invest according to your financial goals, which I’m sure would have made Grandma happy.
Inherited Properties and Businesses
If you are inheriting a property or business, it is important to assess it as if you were investing yourself. After all, you will be on the hook for maintenance, and you will need to deal with the day-to-day management. If this analysis shows that the property or business supports your long-term and short-term financial goals, then you might choose to stay the course.
However, it is important to make sure you have adequate liquidity and cash flow to meet your other financial goals. If the property needs a lot of maintenance or renovation or the business bleeds cash, it may cause a significant drain on your time and energy. Like inheriting stocks, there may be an emotional tie to the inherited property or business that prevents you from wanting to do anything with it. Also, like inheriting stocks, you’ll receive a step-up in basis. It is important to know when it may be necessary to liquidate to meet your other objectives. Working with a real estate or business broker can help to ease this transition.
Conclusion
While emotionally charged, receiving an inheritance can increase your financial freedom to pursue goals that matter to you. Carefully consider the types of assets received alongside your own goals to ensure your financial security.
* This hypothetical example is not indicative of the actual performance of any particular stock or other investment, nor does it account for the impact of any market losses or applicable fees and expenses.
This informational and educational article does not offer or constitute, and should not be relied upon, as tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.
Cicely Jones (CA Insurance Lic. #:0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-5834060.1(08/23)(exp.08/25)
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