Making the Most of Your Inheritance

Inheriting money or assets can bring new challenges and opportunities. Whether you've got a little windfall or a big inheritance, knowing how to handle that influx of wealth is important.

For instance, suppose one of your parents accrued a few shares as part of a retirement plan years ago. At the time, it seemed insignificant and they didn’t pay much attention to the stocks. But over time, the shares split and their value grew substantially. When they passed and you discovered the stock shares as part of your inheritance, they are now worth tens of thousands of dollars. Do you withdraw the money? How do you minimize your tax liabilities? Should you reinvest the shares?

One of the first — and most critical — steps is to talk to a financial professional, a fiduciary who can provide you with an unbiased assessment of your situation. Your advisor will help you make smart choices about your inheritance so you feel confident about your plans and your financial future.

Align your financial goals

Speaking to a professional is important because your goals and investment strategy could be much different than the goals and investment strategy you are inheriting. It’s vital, therefore, to understand the goals of the inheritance so you can incorporate them into your financial plan. An advisor can help you do this. At Yellow Cardinal, we work alongside you to help make what can be a daunting process more comfortable.

You will also want to consult with your accountant for tax advice. They can explain the tax ramifications of your inheritance and suggest strategies for minimizing your tax liabilities. For instance, you may want to reset (or step-up) the cost basis of an appreciated inherited asset for tax purposes. Or if you inherit a retirement account, there may be required minimum distributions each year to avoid IRS penalties. There may also be estate taxes, income taxes, capital gains taxes, and state taxes to name just a few. A certified financial planner, including those with Yellow Cardinal, can help you sort through some of this and make sure you’re prepared for what’s to come.

Communication is key

Inheritances can stir up all sorts of emotions, especially when there are siblings or other beneficiaries in the mix. Sensitive and organized conversations with family members along with plans that are in writing can help keep the peace and make sure everyone knows the goal. Plus, having a trusted advisor in your corner can help keep emotions in check and ensure a fair and legally sound distribution of assets. If you go it alone, you may miss assets, face unexpected tax penalties, or stumble into unnecessary disagreements with family.

How you spend your newfound wealth is something to think about as well. This should depend on your specific situation and goals. Ideally, you approach this mathematically, but for most people, depending on the size of the inheritance, there’s an emotional aspect too. Do you go out and purchase the car or house you’ve always wanted? Or do you pay down outstanding debt? The best answer depends on your given situation and goals.

Again, work with a trusted fiduciary like Yellow Cardinal to make sure how the windfall is spent fits within your overall financial plan. And don’t count your assets before they arrive. The reality is people change their minds. The value of assets and property can fluctuate. If you’ve built a certain dollar amount into your financial plan and it doesn’t happen, you could be creating unnecessary risk.

You’re better off planning for what may come but not depending on it. Rather, be thankful that someone was fortunate enough to have wealth to share and honored that they chose you. Take the appropriate steps to continue their legacy.