Receiving an Inheritance: Things You Should Know

If you have recently received an inheritance, or expect to receive one in the near future, you may be experiencing mixed emotions. Losing a loved one while also receiving money or other assets can be difficult to navigate. You may also face important financial and legal decisions.

There is no need to make every decision immediately. Take time to understand what you have inherited. Obtain appropriate advice and consider how the inheritance fits into your broader financial and estate plan.

Below are five practical steps to consider if you have received, or expect to receive, an inheritance.

5 Steps to Take After Receiving an Inheritance

1. Take your time. Allow yourself time to process your emotions before making significant decisions about your inheritance. Making major financial or estate planning decisions while you are grieving may not be optimal.

   Consider committing to self-care. This may include counselling, meditation, family support or spiritual support. These steps can help you work through the process. You do not necessarily need to make major changes to your financial situation simply because you have received an inheritance.

2. Get professional advice. Before making major decisions about your inheritance, consider obtaining professional financial advice. This could include decisions about paying off debt, investing in a business or purchasing property.

   This can be particularly important if you have never managed a substantial amount of money before. A financial professional can help you consider how the inheritance fits into your broader financial circumstances. An estate planning attorney can also help you consider the legal and estate planning implications.

   An inheritance may affect your eligibility for certain benefits or have tax consequences. These consequences depend on the type of asset you inherit, its value and your circumstances. If you inherit property and later sell it, the tax treatment can depend on your basis in the property. The IRS generally states that inherited property receives a basis equal to its fair market value at the date of death, subject to specific exceptions and rules. IRS guidance on inherited property and basis explains these rules.

3. Understand whether there are strings attached. Before assuming that you can use an inheritance however you wish, understand the terms that apply to the assets.

   Depending on the circumstances, you may receive assets outright. Alternatively, you may receive an interest in a trust where a trustee has discretion over the timing or amount of distributions. Other conditions, restrictions or legal considerations may also affect the inheritance.

   Your estate planning attorney can review the relevant will, trust or other documents and explain your rights and options. Depending on the assets involved and where you live, you may also need to consider federal or state taxes.

   Federal estate tax applies to an estate rather than simply taxing the beneficiary’s share. Some states also impose their own estate, inheritance or other death taxes. The applicable rules depend on your circumstances. Federal estate tax guidance from the IRS provides information about federal estate tax requirements.

   If you inherit property and later sell it, the sale may also have income tax consequences. The outcome can depend on the property’s basis and other circumstances. IRS guidance on gifts and inheritances explains some of the federal tax considerations that may apply.

4. Update your estate plan. Receiving an inheritance can significantly change the value and type of assets you own. Your existing estate plan may no longer reflect your circumstances or goals.

   An inheritance may give you a good reason to review your will, trusts, beneficiary designations, powers of attorney and other estate planning documents. You may also need to consider how you should own, manage or ultimately pass on your inherited assets.

   Reviewing your estate plan after receiving an inheritance can help ensure that your wishes remain properly reflected. It also allows you to consider your newly acquired assets as part of your overall plan.

5. Plan ahead if you expect to inherit. If you have not yet received an inheritance but expect to receive assets from a relative in the future, consider discussing the situation with the person leaving the assets to you and your estate planning attorney where appropriate.

   Depending on your family’s circumstances and the applicable law, you may consider an inheritor’s trust instead of receiving assets outright. Although discussing inheritance planning with a relative can feel difficult, planning ahead may provide opportunities for long-term asset protection and preservation.

   An inheritor’s trust will not suit every family or inheritance. You should carefully consider the structure, terms and legal consequences based on the circumstances of the person creating the trust and the intended beneficiary.

What Should You Do First With an Inheritance?

If you have recently inherited money or other assets, you do not necessarily need to make major financial decisions immediately. Start by understanding exactly what you have inherited. You should also determine whether any conditions, tax considerations or other obligations apply.

Consider taking the following initial steps:

• Identify the assets you have inherited and their current value.
• Review the will, trust or other documents governing the inheritance.
• Determine whether the assets will pass to you outright or remain in trust.
• Keep appropriate records relating to inherited property and its value.
• Obtain financial and legal advice before making significant decisions.
• Review your existing estate plan after your financial circumstances change.

A considered approach can help you avoid significant decisions before you understand the legal, financial and tax implications of the inheritance.

Why an Inheritance May Require an Estate Plan Review

An inheritance can change more than the amount of money you have available. It can change the types of assets you own, the value of your estate and the way you want to provide for your spouse, children or other beneficiaries.

For example, an inheritance may include real estate, investments, a family business, retirement assets or an interest in a trust. Each type of asset can raise different estate planning considerations.

Reviewing your estate plan can help you consider how you should manage these assets during your lifetime and distribute them after your death. It also gives you an opportunity to check whether your beneficiary designations and other arrangements still reflect your wishes.

Protecting an Inheritance for the Long Term

Receiving an inheritance does not necessarily mean that you should spend or invest the assets immediately. Depending on your circumstances, you may want to consider how the inheritance can support both your short-term and long-term goals.

For some individuals, this may involve paying down debt or making investments. For others, it may involve preserving assets for future generations or considering whether a trust or another estate planning structure could help.

The right approach will depend on the nature of the inheritance, your financial circumstances, your family situation and your long-term objectives. Professional legal and financial advice can help you understand your options before you make significant decisions.

Why Legal Advice Can Help

Inheritance planning can involve more than deciding what to do with newly received money. The legal documents governing the inheritance, the way you own the assets, the terms of any trust and your existing estate plan can all affect your options.

An estate planning attorney can review the circumstances surrounding the inheritance and help you understand how the assets fit within your broader estate plan. Legal advice may also help identify issues that you should address before you transfer, sell or invest assets, or incorporate them into your estate plan.

How We Can Help

Receiving an inheritance can be bittersweet, and emotions may run deep during this time. Putting your inheritance to work towards your short-term and long-term financial goals can be a valuable way to make thoughtful use of these assets.

Being informed is an important part of making decisions about an inheritance. If you have received an inheritance, or expect to receive one, contact us to learn more about your legal options and how your inheritance may fit into your estate plan.

Frequently Asked Questions About Inheritances

What should I do first after receiving an inheritance?

Start by understanding exactly what you have inherited. Review the documents governing the inheritance and determine whether any conditions, tax considerations or other legal issues apply. Before making major financial decisions, consider obtaining appropriate legal and financial advice.

Should I update my estate plan after receiving an inheritance?

Receiving an inheritance can change the value and type of assets you own, so reviewing your estate plan may be appropriate. Your attorney can help determine whether your will, trusts, beneficiary designations and other estate planning arrangements should reflect your new circumstances and wishes.

Can an inheritance affect my taxes or benefits?

It can, depending on the type of inheritance, the assets involved, where you live and your individual circumstances. Inherited property can have specific tax basis rules. Some jurisdictions also impose estate, inheritance or other death taxes. Certain benefits may have eligibility rules that you should consider before making decisions about inherited assets.

What is an inheritor’s trust?

An inheritor’s trust is a trust structure that may allow a beneficiary to receive and preserve inherited assets rather than receiving them outright. Depending on the structure and applicable law, it may provide opportunities for asset protection and long-term wealth preservation. It will not suit every situation, so you should review the terms and potential consequences with an estate planning attorney.

Should I spend or invest an inheritance immediately?

There is generally no need to rush into major decisions simply because you have received an inheritance. Take time to understand the assets, obtain professional advice and consider your financial and estate planning goals. This can help you make informed decisions about how to use or preserve the inheritance.