So, you received an inheritance. Now what? In addition to figuring out how to manage your inheritance responsibly, inheriting property, cash, stocks or other assets might have implications. Don’t worry, we are here to offer some guidance.
Managing an Inheritance
Receiving an inheritance often comes with its own set of difficulties. Many people do not know how to handle a substantial windfall responsibly and spend their inheritance quickly and wastefully. Use these tips to manage your inheritance responsibly.
- Take Your Time: Do not rush to make major financial decisions when you receive an inheritance. Until you develop a long-term strategy, place your inheritance into an interest-bearing savings account.
- Define Your Goals: Do you have an emergency fund? Outstanding credit card debt? Student loan payments? Are you nearing retirement? You can use your inheritance to accomplish your financial goals. Consult with a financial planner to help prioritize your financial goals and chart a path to success.
- Build an Advisory Team: When you inherit a large sum of money, many people try to give you advice on how you should handle your money. With a team of trusted financial advisors you can build short—and long-term goals for your inheritance while minimizing your potential tax liability.
- Have Some Fun: After meeting with your financial advisor and developing a clear financial plan, then you can allow yourself to have a little fun with your inheritance money. Make sure, however, to include your “fun budget” in your financial plan. The amount you allot for splurging may vary, but experts recommend reserving 10% or $10,000, whichever is less, for a little indulgence. Now you can enjoy your inheritance while still being responsible with your financial future.
Tax Implications for an Inheritance
Taxes on inherited property and other assets vary depending on your state of residence, type of asset inherited and the asset’s value when you receive it. Consider the following potential tax liabilities:
- Inheritance Tax: Six states levy a tax on inherited property as of 2017.1 The inheritance tax rate varies by state, so verify your potential inheritance tax liability with your tax advisor.
- Capital Gains Tax: If you sell property you inherit, such as real estate or stock, you have to pay capital gains tax on the proceeds from the sale. Inherited property benefits from a “stepped up” basis. Instead of paying capital gains tax on the asset’s original purchase value, the basis for inherited property is “stepped up” to the date of death of the estate owner.
- Income Tax: Generally, any money or assets you inherit do not count toward your taxable income for federal and state income tax purposes. Income generated or interest accrued after you inherit the property, however, is taxable income. As always, speak with your tax and/or legal advisors to get advice as to your particular circumstances.
The bottom line is, when you receive an inheritance, take your time, make smart choices and be sure to plan appropriately for the future. To create your own financial plan, contact a Fifth Third Bank advisor today.