7 ways to prepare to inherit money

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Editor’s Note: This story originally appeared on NewRetirement.

Legacy is just one aspect of what can be a very emotional time.

It can be useful to know what happens when you inherit money or assets. Here are several ways to prepare.

1. Don’t expect it

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The old adage, “don’t count your chickens until they hatch,” rings true when it comes to heirlooms.

If you’re expecting an inheritance, perhaps the best thing to do is not expect it.

A possible inheritance is difficult to count. A lot can happen to the loved one who leaves something to you, and their legacy may not materialize.

However, a survey found that 1 in 3 Americans not only expect an inheritance, but also rely on it to stabilize their financial situation. These expectations do not correspond to reality.

Katherine has the right attitude when she writes, “I expect to inherit some money and property from my mother (I know her will and estate plan) but I’m not factoring it in yet. my plans because she is likely to live a long time and may require a lot of care. It’s her money and she worked hard for it, so I don’t think it’s mine.

2. Be prepared to wait

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Unless your benefactor has a good estate plan, you may have to wait months (sometimes years if the estate is caught up in probate) to receive funds from an inheritance.

3. What happens when you inherit money? Taxes!

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In most states, property taxes are only a problem for the wealthy. (Explore the impact of where you live on inheritance tax.) However, there are other types of tax implications for many inheritances. Specifically, an inheritance can trigger capital gains, income, and property taxes. The amount and maturity date often depend on the type of asset you receive.

Below is a very simplified overview of the tax treatment of different types of assets.

If you receive an inheritance, it may be important for you to calculate the after-tax value of the windfall. Do not consider the full value as your own, only what you can access after paying taxes.

Taxable accounts

There are significant capital gains tax advantages when you inherit a taxable account. These accounts benefit from a tax relief called “step-up in basic”. The base is the starting line for which the taxes are calculated. An increase in the base means that the starting line is moved from the moment the deceased invested the money until the moment of his death.

Example: Let’s say your aunt left you a taxable account. Fifty years ago, she invested $25,000, and through shrewd investing, the account was worth $100,000 on the day of her death. Her cost basis would have been $25,000, so if she had lived and liquidated the account by the date of her death, she would have had to pay taxes on the $75,000 in earnings.

However, she left the account to you. Thus, the value of the appreciated property is readjusted for tax purposes to the value of the account on the day of death. Going forward, you will only pay taxes on winnings you earn over $100,000

Traditional retirement accounts

If you inherit a retirement account like an inherited IRA, you’ll have to pay taxes on the amount you inherit, but you have options to minimize the tax impact.

If you inherit money from a spouse, you can transfer the money to your own IRA and defer withdrawals and taxes until age 72.

If you inherit someone else’s account and want to maintain tax efficiency, you can transfer the money to an inherited IRA account. From there, you must take the required minimum distributions (as defined by the IRS) each year and pay taxes on the money you withdraw. You are allowed to withdraw as much as you want, but all distributions will be taxed.

Roth IRA

So what if you inherit the 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 their own tax advantages and disadvantages. It may be best to consult a financial advisor for your best option.


Like inherited taxable accounts, real estate values ​​are increased by the value of the property on the date of the owner’s death. So let’s say you inherit a house that was originally purchased for $100,000 and is currently appraised at $250,000. If you sell the house at some point after the death of the original owner for $275,000, in this scenario you will only pay capital gains taxes on the $25,000 that has increased in value since you inherited it.

However, the increased value also has implications for property taxes. During the five years between the inheritance and the sale, you will have paid property taxes based on the increased value of the property.

Life insurance

Life insurance is not taxable as income.

4. Be grateful

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Many happy extended families have been torn apart due to inheritances. Even estates with minimal financial value have caused cracks in relationships. I know sisters who don’t talk to each other because of an argument over who might get a cheap watch.

Do you remember tip #1? Don’t expect anything! And, if you receive something, be grateful for what happens.

Not always easy, but gratitude has proven to be an incredible balm for living a contented life.

5. Try to speak frankly with your future benefactor

Women of two generations, millennials and baby boomers

Honest conversations with family members can improve expectations and give everyone a better understanding of the possibilities.

Most people think money is a secret matter, but talking honestly has huge benefits. Discover tips for discussing finances with your loved ones.

6. Take it slow and make a plan to use the money

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If you receive a monetary inheritance, it can usually be used however you see fit. You can pay off your debts, splurge, invest, buy real estate.

However, you may want to consider your options carefully. It may be wise to go slow and make a thoughtful plan for the money. You might want to use a tool like the NewRetirement Planner to run scenarios with various uses of the money and see what the different choices do for you.

7. Keep Legacy Low

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What happens when you inherit the money? Well, sometimes you attract unwanted attention.

It often seems that people consider inherited money in a different category as earned money. Some feel that an inheritance is a blessing to be shared.

However, on the NewRetirement Facebook group, Hook had some potentially useful advice. He said, “Tell as few people as possible about your heritage.

There is no great point in talking about this kind of windfall. This can create jealousy and conflict.

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