~~How to Handle an Inheritance~~

Two Boston College economists, John J. Havens and Paul G. Schervish, estimate that wealth of somewhere between $41 trillion and $136 trillion will change hands by mid-century. However, The National Endowment for Financial Education has estimated that up to 70% of all people who suddenly receive large amounts of money will lose that money within a few years. Don’t let this happen to you.  Here are some suggestions:

  1. Figure our exactly what you will receive – You probably won’t just receive a check from the estate. More than likely you will receive bits and pieces of different investments. The good news is that you usually get a “stepped-up basis,” meaning that the cost basis of the assets you receive is determined as of the date of death.  You also won’t necessarily get all the assets at the same time. Getting different bits and pieces of your inheritance at different times is confusing, and it makes figuring out what you have all the more difficult. You need to know how much your inheritance is, how it is invested and what the cost-   basis is to make good decisions going forward. You also need to know where the money is coming from. For example, if you inherited an Individual Retirement Account, there are major tax implications depending on how you decide to withdraw funds from the account.
  2. Make a list of your short-term and long-term goals – Assign dollar amounts to each goal and then compare your inheritance with how much you will need to meet your goals. This can be a real wake-up call, because when you get a chunk of money, it is very tempting to spend it on short-term goals such as remodeling the kitchen, buying a car or that trip to Europe. However, most of us are going to have difficulty meeting long-term goals such as retirement and education for our children, and the inheritance may be the only way we can achieve them.
  3. Set a limit on how much you are going to use for a splurge – Now that you know how much you will need for your long-term goals, you can set aside money for that luxury cruise or new car. Set up a separate bank account for this money, and when it is gone…it is gone. Resist any temptation to dip into the rest of the money.
  4. Establish an investment strategy for your long-term goals – Make sure that the investments you chose match your time horizon and risk tolerance. Also, as you develop the strategy, keep in mind that the tax consequences of retirement plan money you inherit is different than non retirement plan money.

Losing someone close to you is difficult enough…treat the inheritance with the stewardship that will not add feelings of guilt.  When you receive their money you may feel rich, but take the time to plan for a secure future before deciding how much you can afford to splurge.


About Don James, CPA/PFS, CFP
Don is the Tax & Financial Planning partner with Kiplinger & Co., CPAs headquartered in sunny Cleveland, Ohio since 1982. He partners with business owners and families and specializes in goal achievement solutions, tax minimization strategies and serves in the role of gatekeeper of sound financial advice.

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