As Prime Women, we have reached the age where our elders are passing away. Mothers and fathers, aunts and uncles, even elderly grandparents. Many times, those passing away have assets remaining which they leave to family, both immediate and sometimes more distant family members. Sometimes the inheritance was expected because of a level of wealth or because the information was shared with you before they passed away. Sometimes it is a complete surprise! This differs from a spouse or partner passing and leaving their share of assets to you. When a spouse dies, we expect their assets to be left to us and left expressly for our continued support and support of dependent children.
Even if you knew that a relative was leaving you something, you might not have known exactly what that entailed. Often the expectation is there of some inheritance, but we assume the owner will live a very long life and spend it all on their own needs as they age. Sometimes we are led to believe we are getting an inheritance, we assume it is money, and it ends up being some “thing” the deceased wanted us to have, but we don’t value it as they did. And to add another twist, sometimes a relative with whom you had a difficult relationship will leave you something. So what do you do?
First, sit back and do little beyond what is legally required of you. You need to allow yourself time to digest the news and what it entails. Just as when a spouse dies, it is wise to take as much time as possible to make any decisions. If the inheritance is money in any form, you may need to retitle an account in your name, but even this is a decision to be delayed if possible.
The exception to this advice is if you inherit a large amount of stock in one company or a stock portfolio that is well beyond your comfort level with risk, consider converting it to a money market type of cash account. The stock market is experiencing all-time highs and could shift dramatically before you decide what to do with the inherited funds.
Sometimes an inheritance is left to you in a legal entity called a trust, and some other person or a financial institution may even be the trustee. In this case, you will have to live by the terms of the trust. The trust may even limit your access to the funds. For example, you can only withdraw a set percentage or amount annually. If this happens, and you find yourself upset about it, please remember the person who left it to you had their reasons for doing it this way.
The attorney involved will help you understand the terms of the trust and when and how you can get anything out of the trust. Or, if it was not left in a trust, you and your advisors may decide a trust entity would be appropriate in your situation for asset protection. Talk to an attorney to find out how you can set up a trust and if it makes sense for your situation.
Spend some time thinking about the gift you have received. How does it make you feel? Not financially, but what emotions does it evoke? Do you feel honored, loved, or even undeserving? Did you have a contentious relationship and think they are still trying to control you? Work through all this before making any final decisions. For example, if you don’t need it, don’t want it, wish that person had never left it to you: think of how you can turn that around for closure. Could you donate it to your favorite cause?
You need to be sure you understand any and all tax implications before you do anything else to avoid any surprise tax bills. For example, if you inherit certain types of retirement accounts, you will owe taxes as you withdraw the money. Recent tax law changes in the U.S. may impact the length of time you have to withdraw from the account.
Other types of accounts, such as a ROTH IRA, can be withdrawn with no tax liability. Be sure you know before you spend it, even spending it in your imagination! You would hate to plan a certain amount to be used toward a certain goal, only to find that after taxes, you don’t have as much as you needed for that goal! And the additional income could push you into a higher tax bracket.
What will this mean to you? What is the best use of the money in your unique situation? Many people think of an inheritance as “free money” to be spent frivolously. But it could mean much more if you take the time to evaluate your own plans. And begin by doing this by yourself. It’s perfectly fine to have a discussion with your spouse or partner about the money. But remember, it was left to you, and it is your decision to make.
And while you may want to talk with a sibling who shared in the inheritance left by a parent, remember that everyone’s situation is unique. What seems like a small amount to you may be a large amount to a sibling, depending on each of your financial situations. Discussing it can bring up differences in your own financial lives and create ill-will if one of you has experienced greater financial success than the other. A less well-off sibling may even be hurt that Mom didn’t leave him more than she left you. In my experience, parents want to treat their kids equally to avoid the appearance of favoritism.
Make a plan! If you don’t have a financial plan and a financial planner, now is the perfect opportunity to build this relationship and make a plan. Financial planners have seen this situation many times and can give you ideas that have worked for their clients.
On a more personal note, once you have gone through this process, consider acknowledging the gift by writing a letter to the person who was generous and thoughtful toward you. Write what you would say to them if you could. Thank them for the gift. Come back later and update this with how you decided to use the money. This process can help bring you closure and feel gratitude for the gift.
Rosemary Wright, CFP®, is a Senior Financial Planner and Co-Director of Women’s Services for National Wealth Partners, LLC. The information contained in this article is provided for informational purposes only. It is not intended to provide investment, tax, accounting, or legal advice. Be sure to first consult with a qualified Investment Advisor Representative or tax professional before implementing any investment strategy.