Managing and Preserving Inherited Wealth An inheritance can make a meaningful difference in your personal finances. Because it is often related to the loss of a loved one, it can be a very challenging time. It is imperative to realize it is not necessary to make any immediate decisions concerning the assets, unless it is for tax or legal purposes. When you are ready to consider how to use the inheritance your benefactor left you, you’ll have an excellent opportunity to further solidify your financial situation and lay the groundwork for what you can accomplish with it. Many financial advisors also emphasize the importance of resisting the urge to make impulsive, big-ticket purchases, such as an expensive car, vacation home or boat. These types of purchases could increase your monthly expenses beyond what is affordable. CONSIDERATIONS IF YOU RECEIVE AN INHERITANCE The first step in establishing plans for an inheritance is understanding the various financial aspects of the assets and looking at how they impact your financial plan, tax situation and life goals. This will allow you to maximize the inheritance for your Depending on the size of your inheritance, it may impact your financial objectives, bring current goals within reach, or open the door to new opportunities. That’s why it is wise to talk to a financial advisor to see how receiving these assets impact your financial life. Determining how to incorporate inherited assets into your plan depends on several factors. These include the type of assets you inherit, your financial situation and any wishes your benefactor may have expressed about your inheritance. FUND AN EMERGENCY ACCOUNT If you don’t have a cash reserve or emergency fund, an inheritance provides an opportune time to create one. A general rule of thumb is to have three to six months of expenses held in a liquid cash account. PAY DOWN DEBT An inheritance offers you a great chance to pay down high-interest debt. If you have credit card or student loan debt, you may be paying interest in the high single and double digit range. However, it is a good idea to look at the interest rates you are paying for other debt, such as a mortgage. If you have a mortgage rate in the low single digits and receive a tax deduction, it may be advantageous to invest your inheritance with the potential to earn a higher rate of return annually.. INHERITING STOCK You may inherit stock either through a trust or outright. A major consideration is whether you should sell the stock. A primary factor is your overall investment strategy and what type of stock you’ve acquired. If you inherit stock and learn that it doesn’t fit your portfolio, you may consider selling it, depending on the market conditions. Please consult your tax advisor and investment advisor first. DIVERSIFY It’s important to diversify inherited assets and integrate them into your investment plan so they align with your financial objectives. Your benefactor may have had a completely different investment objective that does not complement yours. long-term financial security. UPDATE YOUR FINANCIAL PLAN
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If you received an interest in a trust, familiarize yourself with the trust document and terms for receiving distributions from the trust, as well as the trustee and trust administration fees. RETIREMENT SAVINGS Tax treatment of inherited retirement assets is complex and you have a wide range of choices available to manage the funds based on the type of retirement plan and your relationship to the deceased. It is wise to consult financial and tax advisors before taking any money from an inherited retirement plan to ensure it is managed properly to avoid unnecessary tax payments. For example, if you inherited an IRA, there are strategies you can use to extend the tax-deferred growth of those assets, or even pass them on to your heirs. INSURANCE When you inherit wealth, it is often advisable to reevaluate your insurance coverage. You may need to buy personal liability insurance or expand the coverage you already have to protect your inheritance. If you inherited valuable personal property, such as jewelry, antiques or real estate, you will probably need to increase your property and casualty coverage or purchase new coverage. You may also need to recalculate the amount of life insurance you need. You might require more life insurance to cover your estate tax liability so beneficiaries receive more of your estate after taxes. TAX IMPLICATIONS If your inheritance is from a spouse, there may be no estate or inheritance taxes due. Life insurance proceeds are also generally free of income tax. In most other cases, your inheritance may be subject to federal estate tax or state inheritance tax. Income taxes are also a consideration. If you received non-retirement assets, your inheritance most likely received a step-up in cost basis, so that if you ever sell the assets the capital gains taxes owed will be based on fair market value at the date of the benefactor’s death rather than the original purchase price. Making a charitable gift from your inheritance can help you minimize taxes while also supporting the causes of qualified charities that are meaningful to you. You may also want to explore the tax advantages of a 529 plan to make gifts toward the higher education expenses of loved ones. WHAT TO DO NEXT Select a financial advisor who can help you prudently address all of the different aspects involved in receiving an inheritance. Determine what types of assets you have inherited. Talk to your investment advisor to see how the new assets impact your current financial situation, objectives and investments as well as explore opportunities to use inherited wealth to achieve your short-term and long-term goals. Work with your other professional advisors, such as your attorney and accountant, to avoid paying an unnecessarily large portion of your inheritance to taxes.
To explore how the preceding article could potentially impact your investments, please contact a Commerce Trust advisor. 1-855-295-7821 | commercetrustcompany.com
Wealth | Investments | Planning Commerce Trust Company
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