Often when we think of an unexpected financial event in our lives, we immediately assume it is something that will potentially harm our budget and long-term goals. We might think that a monetary windfall may be the last thing on our minds, but one thing that we do not think of is losing a loved one. Consider though if your friend or family member who passed away loved you and your family enough to grace you with a financial blessing. Being a good steward with what he or she worked for is important, and you may have some tough choices to make to incorporate an inheritance into your long-term plan.
According to the Survey of Consumer Finances, the median inheritance was $69,000 in 2015. Loved ones may bequeath cash, investments, a house, his or her car, among other assets. If the decedent left you a piece of an IRA, there are required steps to take to liquidate the IRA promptly per federal requirements, so there is a framework already in place for that type of account. A general taxable brokerage or checking account does not have a defined outline for withdrawal, however. It is legally important to follow all the necessary rules for account liquidation, and TFC is here to ensure we follow the proper procedures.
In addition to IRA liquidation rules, we must be mindful of any applicable estate taxes and title transfers. In Michigan, there is no estate tax, but there is a federal estate tax and other states may have a tax of their own. Don’t fret over this much as taxes are typically due only on very large estates.
After taxes are considered, there are ways to optimize the value of your inherited assets. Often, life insurance is paid out to heirs in the form of a tax-free influx of cash that should be used to pay off debts (perhaps related to funeral expenses) or invest for longer-term goals. We are here to help you appropriately accomplish that transfer.
Sure it makes all the logical sense in the world to immediately implement the inheritance into your financial plan. That may mean selling unwanted and sub-optimal investments and buying ones that are suited to your return and risk objectives per your Investment Policy Statement. But that can be very difficult emotionally.
It is a natural response to want to hold on to your loved one’s assets. We can slowly make the transition into your investment plan – that is ok. The important thing is to balance the logic and emotion of the situation. Life does not happen on a spreadsheet. Coping with a difficult and emotional life event takes precedence over the precise best financial path sometimes.
Your late friend or family member likely wanted you to enjoy the asset you inherited. Let’s sit down and discuss how we can use it to better secure the financial future for you and your family. There are few better uses of money than bettering the lives of future generations within your family. Consider it a wonderful gift.
Here’s the point
- An inheritance can be a blessing during a difficult emotional time following the passing of a loved one.
- We must be mindful of applicable rules, taxes & procedures to liquidate accounts and transfer assets.
- While not an immediate need, it is essential to eventually implement an inheritance into your financial plan – that may include paying off debt, building an emergency fund, investing for retirement or college, among other goals.
Action items
- Money issues are secondary to life’s emotions sometimes.
- Follow the rules. Sit down with TFC and let’s ensure that we are abiding by regulations to properly execute the will and dispose of assets. It can be expensive and unnerving if a step is missed.
- Let’s incorporate your financial blessing into your long-term plan.
Photo by Khadeeja Yasser on Unsplash