Receiving a large inheritance can feel overwhelming. Not only do you have the situation that left you with the inheritance to begin with, but now you need to consider what this means for your finances.
If you are wondering how to get help with an inheritance you’ve just received, or expect to soon, here are a few key things to consider.
Type of Inheritance
First, let’s talk about the inheritance itself and clear up some confusion.
One of the most common myths we often hear as financial advisors about receiving an inheritance is that you’ll automatically receive a hefty tax bill to go with it. You may have some tax liabilities due to the nature of the inheritance. However, there is no Federal inheritance tax. Meaning, the simple act of receiving an inheritance itself doesn’t trigger taxes. Some states have an inheritance tax at the state level, but Texas isn’t one of them.
There is an estate tax, but that applies before you receive your inheritance and the vast majority of estates fall well below the estate tax threshold anyway.
Any tax liability you may have will depend on the form of the inheritance. Common examples are:
Cash and Life Insurance
If you inherit cash either directly or due to a life insurance pay-out then odds are you won’t owe any taxes at all. (But watch out for the Goodman Triangle)
The money is yours to spend, save, or invest how you see fit.
Investments and Property
Generally, assets such as investments (stocks, mutual funds) or property are only taxed when and if you sell them, and that depends on whether you sell them for a gain.
Additionally, inherited assets usually benefit from what is called stepped up basis. That means your tax liability is based on any gain between the value on the day the original owner passed, and the day you sell. This often means there is little or no tax at all if you intend to sell the property soon.
Due to the SECURE Act of 2019 eliminating the stretch IRA, in most cases you’ll be required to withdraw any money passed to you in a retirement account within 10 years. For ordinary tax-deferred accounts like IRAs and 401ks the distribution is taxable as income. When you withdraw that money, you must include it in your income. You will incur the appropriate income tax liability depending on the bracket you are in.
There are exceptions to this rule. It doesn’t apply to surviving spouses, minor children, the disabled or chronically ill, and someone within 10 years of age of the deceased.
Yes, this new 10-year rule even applies to Inherited Roth IRAs, but the withdrawal is tax-free.
What Type of Professional Can Help?
You have several options for how to get help with an inheritance. The type of help you need depends in part on the type of inheritance you receive, and partly on what you intend to do with it.
An attorney, financial planner, or CPA may be able to help you, and in many cases all three will be involved.
What do you Want to do with the Inheritance?
The first thing you’ll want to consider is what your plans are for the inheritance. This will help you decide which type of professional you need to be speaking with.
Some examples of what I mean:
- Maybe you have inherited property and simply want to keep it. In this case hiring an attorney to help you make sure it is properly titled would be a good starting point.
- You are left a small amount of money or property that you intend to sell and simply plan to hold the cash or pay off some debt, such as a car loan. Informing your CPA might be all you need to do.
- Your inheritance is a large amount of cash, investments, or a retirement account and you want to use it for long-term planning purposes. A financial planner is most appropriate to help you here.
What Certifications Should They Have?
Once you have an idea of what you want to do with your inheritance and the type of professional you need to contact for help, you can start searching.
When looking for a professional, there are two main things to consider.
- Do they specialize in what I need?
- Are they qualified to help me?
To answer the first question, you can simply ask them. You can also check out their website to see if they mention working with people in your situation.
For the second question, you can check their qualifications.
Attorneys have pretty standardized education and licensing requirements. A licensed attorney will hold a law degree and be admitted to practice. It’s pretty straightforward. Really what you are looking for with an attorney is that they specialize in or have specific experience with your particular need.
Education and licensing are far less standardized in this arena. (One of the chief complaints by those of us hoping to advance the professional standards!) Pretty much anyone can call themselves a financial planner – bankers, investment advisors, insurance agents – regardless of education or licensing.
That makes credentialing more important when looking for an advisor to help you with long-term planning. There are a lot of different credentials an advisor might have, but the two most important things to look for are:
- Is the advisor a Certified Financial Planner (CFP)? This is the predominant certification for financial planners. You can search for and verify CFP professionals here.
- Are they a fiduciary? I know – you have no idea how to pronounce that. And if you had heard someone say it you’d have no idea how to spell it. It’s a legal standard that means the advisor is required to make recommendations that are in your best interest.
These two things don’t guarantee that you are talking to the right person, but it’s a good start.
If you already use an accountant to help you with your taxes, they are the first person you should mention your inheritance to. They will know what the immediate impacts to you will be and can help you decide what to do next from a tax standpoint.
If you are not already working with a tax professional, a CPA or Enrolled Agent that specializes in individual taxes would be worth speaking with.
How to Get Help with an Inheritance
This should help you get started. In most circumstances that involve an inheritance, you’ll end up speaking with an attorney, financial planner, and accountant, but not always.
Ultimately, who you should speak with is dependent on what your situation is and what you want to accomplish.