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Inheritance – 3 Steps to Handle the Details


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You find out you’re receiving an inheritance and the first thing that comes to mind is – What next?

Inheritances can provide incredible flexibility but without effective financial planning, you may miss some of the organized steps needed to get there.

This process is often emotional and can create extra decision-making that seems daunting.

Helping many clients through this process, we’ve made a list of several of the more important things to accomplish when you know an inheritance may be coming your way.

1. Take Inventory

One of the first and most important steps is to determine where accounts are located and how they are registered.  If you are the executor/executrix this will help to determine if you have access to liquid assets so that you can pay any outstanding bills and taxes.

If you are not the executor, you would still like to know how the accounts are registered to assure they are handled in the most tax-efficient manner.

For assets in non-retirement accounts, assets receive a step-up in basis equal to the date of death value (or the alternate valuation date which is 6 months later, if elected by the executor).

2. Stretch your IRA withdrawals

You discover you are the beneficiary on an IRA, so how will you be taxed? This is not an issue for spouses, as they can change the name of the Individual Retirement Account (IRA) and make it their own. But if you are a non-spouse beneficiary, you have several options, including withdrawing the money outright, withdrawing over 5 years or stretching withdrawals over your lifetime.

Your first move will be to set up an inherited IRA in your own name before making this decision.  Because any withdrawals from a traditional IRA will be taxed at your ordinary income tax rate, calculate your tax liability before acting.

If the deceased owner was already past the minimum distribution date (70 ½), you can continue their distribution schedule or recalculate with your own life expectancy.  But if the owner was under 70 ½, in addition to using your own life expectancy for the mandatory annual withdrawals required by the IRS, you can also choose to take the entire balance 5 years after the owner’s death.

Consulting a financial planner will help you with the account set-up and appropriate distribution schedule.

3. Determine your Risk Preferences

An important factor in the amount of risk in your investment strategy depends heavily on the direction of your cash flow.  Taking large withdrawals necessitates a lower stock allocation while saving, or not withdrawing funds, allows for a higher stock allocation.

The best way to determine how much you should have invested in stock investments is to complete a financial plan.  The plan first helps you to determine a priority schedule in uses for the inheritance:

  • High-interest debt pay down
  • Savings (retirement and short-term)
  • Large extraordinary type of expenses

After factoring in these objectives along with your income, you will have year by year targets for income, savings, debts and expenses.  With this information, and from conversations with your financial planner, we begin our investment management service which helps to implement recommendations to reach the appropriate amount of risk for your situation.

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