Getting an Inheritance? Here Are 4 Things to Consider

1. 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 (opens in new tab).

The probate process can be avoided if assets are held in trust, but even distributions from trusts carry their own complexities at times. Because of that and many other potential speed bumps along the way, settling an estate can take several months (opens in new tab), sometimes years. Knowing that will help you manage expectations related to the timing of when you’ll receive your inheritance.

The executor (the person appointed to administer the will) must notify beneficiaries and interested parties, pay outstanding bills, close accounts, take inventory of assets and determine if any of the assets not part of the will must go through probate. Then they must file with the IRS to pay taxes. Only after all of that is taken care of can the assets finally be distributed to close the estate.

2. Have a Plan for the Money.

Take your time. Getting an inheritance can feel like found money, and we often fall prey to a bias called mental accounting (opens in new tab), 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 (opens in new tab) 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.

This is an opportunity to put the money toward some practicalities, including ways to help protect your future. Before taking off to spend the inheritance on fun stuff, consider building up your emergency fund, paying off high-interest debt and putting some savings toward long-term goals.

Once you’ve addressed your financial priorities, then it’s OK to start thinking about spending the money on something fun. Maybe you’ll want to plan a trip somewhere that was special to you and your loved one, or support a cause that was close to their heart. Or maybe there’s an utterly impractical purchase that you’ve always hankered after. All these are even more enjoyable when your mind isn’t burdened with competing financial goals.

3. Seek Advice From Professionals.

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.

If this already sounds confusing, it’s because inheritance rules can be complex and specific. An estate planning attorney will be able to walk you through whether this potential benefit, or any others, applies to you. Seeking advice from estate professionals ensures that you navigate this complicated paperwork legally and smoothly.

Unless you are inheriting an amount over the federal estate tax exemption amount, which is $12.92 million for 2023, you will not have to pay federal estate taxes – which are as high as 40%. A CPA can help you navigate through the numerous rules, which can be confusing and costly if you make a mistake. There are also state estate and inheritance taxes to consider as well, so be sure to do your research and get help if you happen to live in one of the 18 states that have estate or inheritance taxes.

4. Take Time to 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.

This includes keeping clear records of all your accounts, along with any estate plan documents including trusts, wills, powers of attorney and advance health care directives. And you should keep them all in a place that is accessible to those responsible for administering your estate.

Try to talk to your family about your finances while you are still around. Finding answers when someone is gone is far harder than having fearless conversations now. The best gift that you can give the friends and family you leave behind is doing proper planning.

Receiving an inheritance is an opportunity to make a difference in your own life. Take the time to map out your current financial position and future goals. Setting yourself up for a solid future is a great way to honor and remember the person who has passed.

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Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC (opens in new tab) or with FINRA (opens in new tab).