If You Receive an Inheritance, Here’s How to Handle It
When we hear stories about financial windfalls, they often involve life-changing amounts of money. However, for most people, inheritances are not as exciting or extravagant. According to a University of Pennsylvania analysis, the average American inheritance between 2001 and 2019 was just over $12,000. This number is influenced by the fact that the majority of Americans receive no inheritance at all. For those lucky enough to receive an inheritance, it can still require some careful financial planning.
Inheritances typically come in the form of cash, real estate, or investments. Handling each type requires different strategies. Let’s explore how financial professionals suggest managing these assets.
How to Handle a Cash Inheritance
Cash inheritances are the easiest to handle, especially if the amount is not substantial. For 2023, you won’t owe federal taxes on any cash inheritance up to $12.92 million. This means you can use the money as you see fit. However, it’s essential to consider your financial goals and priorities.
If you don’t have an emergency fund, using the inheritance to create one is a wise move. Additionally, paying off high-interest rate debt should be a priority. Once you’ve tackled expensive debt, you may want to consider paying off low-rate debt or investing the money.
How to Handle Inheriting Real Estate
Inheriting real estate is another common scenario. Luckily, you’re unlikely to encounter inheritance tax limits on real estate inheritances. Thanks to a rule called a step-up in basis, you won’t owe any tax on the property initially.
However, it’s crucial to remember that the estate settlement process can take time, and real estate values can change. To navigate this process smoothly, it’s advisable to get the property appraised as soon as possible. This will help if you need to sell the property or divide it among siblings.
While deciding what to do with the inherited real estate, consider the costs associated with upkeep and potential rental income. Understanding the expenses involved will help you make an informed decision.
How to Manage Inheriting Investments
Inherited investments in taxable accounts usually come with a step-up in basis, allowing you to sell them without incurring immediate tax liabilities. However, if you decide to hold onto the investments, any gains realized in the future will be subject to taxes.
Retirement accounts funded with pre-tax dollars, such as 401(k)s and traditional IRAs, have different rules. With these accounts, you’ll need to consider tax implications when withdrawing the money. Seeking advice from tax advisors and estate planning attorneys can help ensure tax-efficient management of inherited investments.
Receiving an inheritance can be an opportunity to improve your financial situation, but it requires careful consideration and planning. Engaging professionals and understanding the tax implications will help you make the most of your inheritance.
