We found this column in Kiplinger’s newsletter. We’ve summarized the tips here. For the complete story, follow the author’s link below.
By Julia Pham, CFP®, AIF®, CDFA®
Getting an inheritance can feel very much like a mixed blessing. It often comes after the passing of a loved one – while you’re dealing with the emotions of losing them and trying to organize financial and administrative affairs.
You can’t always predict what is left in a will, but if you have received or anticipate receiving some type of inheritance, there are important things to consider that can help you prepare for the issues that heirs face.
Here are my top four:
Expect the Process to Take Time
Settling an estate is a big task. When a decedent’s affairs aren’t in order, it’s an even bigger task. In fact, Gallup estimates that less than half of U.S. adults have a will.
Have a Plan
Take your time. Getting an inheritance can feel like found money, and we often fall prey to a bias called mental accounting, where we sort our money into different “accounts” and so treat each group of money differently. In a particular case study, researcher Richard Thaler, the person attributed to the concept of mental accounting, found that people are more likely to spend a small inheritance and invest a large one. Factors such as where the money came from or its intended use influence how it’s spent (or saved), but a dollar that you are given should be treated just the same as a dollar that’s earned.
Ask a Professional
The rules on inheriting assets can be nuanced. For example, there are times when inheritors may have what’s called a step-up-in-basis provision for taxes. This allows heirs to have the valuation of their inherited property be equal to its fair market value at the date of death – instead of the lower price at which it was purchased. This is a strategy that helps minimize capital gains taxes on inherited assets that have appreciated over time.
Review Your Own Estate Plan
As someone who is inheriting money – and maybe even acting as the executor of the estate – you’ll learn all about proper planning and communication. That understanding should motivate you to make your own estate administration as easy as possible after you are gone.