3 Key Steps to Take Upon Receiving an Inheritance
As the largest and wealthiest generation of Americans prepares to retire, as much as $68 trillion will be passed down to younger generations over the next two decades. This phenomenon, dubbed “The Great Wealth Transfer,” is already beginning today.
If you receive an inheritance, whether expected or unexpected, do you know what to do on day one? Planning in advance reduces the risk of not using the money efficiently and helps remove emotion from the process. Read on for three key steps for heirs to take when receiving an inheritance.
Note: Iowa Governor Kim Reynolds is expected to soon sign a major tax reform bill. Among other things, this law phases out the state inheritance tax by reducing the effective tax rate 20% per year over four years, and eliminating the tax on January 1, 2025. Until then, an inheritance received by an Iowa resident may be subject to state inheritance tax if its value is more than $25,000. Inheritances received by a surviving spouse, parents, grandparents, or lineal descendants of the deceased are generally exempt from the Iowa inheritance tax no matter the value of the estate or the amount inherited. Tax rates from 5% to 15% may apply to inheritances that are not otherwise exempt.
1. Discretion is key
Remember that receiving an inheritance is no business but your own as an heir. It is usually in your best interest to keep the matter of your inheritance as private as possible. Think about lottery winners whose winnings make the local news. Often, the lucky winners find themselves inundated with cash requests from friends, family, neighbors, co-workers, old classmates and perfect strangers.
Making rational decisions with money is hard enough without a public audience. By keeping your inheritance news between you and your spouse or partner, you can help reduce external influences around financial decisions involving your inheritance.
2. Consult with your family tax advisors
Receiving an inheritance has possible income tax, estate tax and inheritance tax implications. Before even thinking about retiring debt, making a major purchase or investing any inherited assets, you should understand the tax landscape and what taxes, if any, you may owe as an heir.
Receiving an inheritance may not be an income taxable event, but the earnings that the inherited assets produce – such as interest, dividends, rental income and farm income – are usually treated as ordinary income and need to be reported on the heir’s personal tax return each year. Potential taxes on capital gains should also be considered before inherited assets are sold.
Beyond consulting with your own tax advisor, an heir should confirm that the grantor/testator’s final tax obligations have been satisfied. By being proactive, you can avoid the uncomfortable situation of needing to return part of an inheritance to cover the grantor/testator’s final income tax or estate tax obligations. It happens more often than you might think.
3. Consult with your financial advisor
Once the tax landscape is properly addressed, you have many choices ahead on how to use your inheritance. Spend? Retire debt? Save? Invest? Donate? All of the above? It can be difficult to weigh the various options and make an informed decision because emotion tends to creep in, skewing judgment. This is where consulting with an objective financial advisor can make all the difference. The advisor can help you identify possibilities, analyze them, and make plans based on what is best for you and your family based on your unique goals and situation.
- If you’d like to begin working with a financial advisor, be sure to read this article about what to look for when engaging an advisor.
- Ready to plan for your future as an heir? Connect with a Bankers Trust Wealth Advisor.
- Subscribe to our weekly e-newsletter.
Bankers Trust Company and its affiliates and their representatives do not provide tax or legal advice. This article is intended for informational purposes only and should not be construed as tax or legal advice. You should consult with your tax and legal advisors regarding your unique situation and needs.