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June 20, 2024 • 9 minutes
Inheritance is only one aspect of what can be a very emotional time period. It can be useful to know what happens when you inherit money or assets. Below are 7 ways to prepare.
The old adage, “don’t count your chickens before they hatch,” rings true when it comes to inheritances.
If you are expecting an inheritance, maybe the best thing you can do is not expect it.
A possible inheritance is difficult to bank. There is a lot that can happen to the loved one who is leaving you something and their bequest may not come to fruition. Too many potential heirs expect an inheritance only to find that medical costs, a long life, or long term care needs have eroded the estate of their benefactor. (NOTE: Long term care is a serious cost concern as people age.)
However, a recent survey found that one in three Americans are not only expecting an inheritance, but are banking on it to stabilize their financial situation. Those expectations don’t match reality.
Katherine has the right attitude when she wrote, “I expect I’ll inherit some money and property from my mother (I know her will and estate plan) but I don’t factor it into my plans just yet because she’s likely to live a long time and may need lots of care. It’s her money and she worked hard for it so I don’t think of it as mine.”
Unless your benefactor has a good estate plan, you may need to wait months (sometimes years if the estate gets caught up in probate) to receive funds from an inheritance.
In most states, estate taxes are only a problem for the uber wealthy. However, there are other kinds of tax implications for many inheritances. Most notably, an inheritance can trigger capital gains, income, and property taxes. How much and when they come due often depends on the type of asset you are receiving.
Below is a highly simplified run down of tax treatment for different types of assets.
If you receive an inheritance, it may be important for you to calculate the after-tax value of the windfall. Don’t think of the total value as yours, just what you can access after taxes are paid.
There are significant advantages with regards to capital gains taxes when you inherit a taxable account. These accounts benefit from a tax break known as a step-up in basis. The basis is the starting line for which taxes are calculated. A step-up in basis means that the starting line is moved from when the deceased invested the money to when they died.
Example: Let’s say your Aunt bequeathed you a taxable account. Fifty years ago she invested $25,000 and through savvy investing, the account was worth $100,000 on the day she died. Her cost basis is would have been $25,000, so if she had lived and liquidated the account on the date of her death, she would need to pay taxes on the $75,000 in gains.
However, she left the account to you. As such, the value of the appreciated asset is readjusted for tax purposes to the value of the account on the day of death. Moving forward, you will only pay taxes on gains you earn in excess of the $100,000
If you inherit a retirement account like an inherited IRA, you will have to pay taxes on the amount you inherit, but you have options to minimize the tax impact.
Inheriting money from a spouse? You can roll over the money into your own IRA and postpone withdrawals and the tax hit until you are 72.
If you are inheriting the account from anyone else, and you want to maintain tax efficiencies, you can roll the money into an inherited IRA account. From there, you must take required minimum distributions (as defined by the IRS) every year and pay taxes on the money you withdraw. You are allowed to withdraw as much as you like, but all distributions will be taxed.
So, what happens if you inherit money in a Roth IRA?
If the inherited Roth IRA is from your spouse and you are the sole beneficiary, then you can treat the account as your own.
Other types of beneficiaries have different options for the money, each with its own tax advantages and disadvantages. It may be best to consult with a financial advisor for your best option.
Like inherited taxable accounts, real estate values are stepped up to the value of the property on the date of the owner’s death. So, let’s say you inherit a home that was originally purchased for $100,000 and is currently valued at $250,000. If you sell the home at some period of time after the death of the original owner for $275,000 then, in this scenario, you will only pay capital gains taxes on the $25,000 it rose in value since you inherited it.
However, the stepped up value also has implications for property taxes. During the five years between the inheritance and sale, you will have paid property taxes based on the stepped up value of the property.
Life insurance is not taxable as income.
Many happy extended families have been torn apart due to inheritances. Even estates with minimal financial value have caused fissures in relationships. I know sisters who don’t speak with each other because of a dispute over who could have an inexpensive watch.
Remember tip number one? Don’t expect anything! And, if you receive something be grateful for whatever it happens to be.
Not always easy, but gratitude has been proven to be an incredible salve for living a contented life.
Honest conversations with family members can improve expectations and give everyone a better understanding of possibilities.
Most people think of money as hush hush, but honest talk has tremendous benefits. See tips for discussing finances with your loved ones.
If you receive a monetary inheritance, it can usually be used however you like. You can pay down debt, splurge, invest, buy real estate.
However, you may want to consider your options carefully. It can be wise to go slow and make a thoughtful plan for the money. You may want to use a tool like the Boldin Retirement Planner to run scenarios with various uses of the money and see what different choices do for you.
What happens when you inherit money? Well, sometimes you attract unwanted attention.
It often seems that people view inherited money in a different category as earned money. Some have the impression that an inheritance is a windfall that should be shared.
However, on the Boldin Facebook group, Hook had potentially useful advice. He said, “Tell as few people about your inheritance as possible.”
There is not a lot of good that can come from talking about this kind of windfall. It can create jealousies and conflict.
Receiving a money inheritance can be both emotional and overwhelming. Whether you expect to inherit money or have just received an inheritance, knowing what to do next is essential. Without a clear plan, it’s easy to let inherited money slip away or cause unintended tax consequences.
The first step is to pause and assess. Before making large purchases or big financial moves, take time to understand what you’ve inherited, where the funds are held, and what legal or tax steps might apply. It’s common to feel unsure about what to do with inheritance money—but thoughtful planning can help turn it into lasting security.
Whether it’s cash, investments, property, or retirement accounts, inherited money has the power to improve your financial future. The key is to align it with your long-term goals. That may mean paying down debt, boosting retirement savings, starting a business, or simply creating a financial cushion.
At Boldin, we help you understand what happens when you inherit money and how to make informed choices. Inheritance can be life-changing, but only if you manage it with purpose and clarity.
If there is a chance you’ll receive an inheritance or other future lump sum, model that possibility in the Boldin Retirement Planner. You should also run a scenario when you don’t receive the money. Or, see what happens if your inheritance is a fraction of what you anticipated.
Contingency planning is a strength of the Boldin Retirement Planner. It can help you consider what might happen under a variety of different conditions. And, you will gain confidence that you can be secure no matter what.
A: Start by understanding what you’ve inherited. Don’t rush. Pay off high-interest debt, build emergency savings, or invest for long-term goals. Avoid impulse decisions.
A: You may need to go through probate or work with an estate attorney. Depending on the type of asset, there could be taxes or transfer rules involved.
A: In many cases, inheritance itself isn’t taxed, but income generated from it may be. Retirement accounts, however, can trigger required withdrawals and tax obligations.
A: Yes. A sudden increase in assets can shift your savings needs, tax strategy, or retirement timeline. It’s smart to revisit your plan with updated numbers.
A: That depends on your situation. If you’re financially stable, investing may offer more long-term growth. If you have pressing needs, use it strategically to relieve pressure.
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