Make Plans for that Inheritance Before the Money’s Spent

Herb White - Weighing Your Financial OptionsIs there an inheritance in your future?
So often we wait until the last minute to decide how we will handle an inheritance, and then find out too late we made an unwise decision. Don’t let that happen to you. Before the inheritance arrives, ask yourself these questions:

  • How will taxes affect your inheritance?
  • What will you use the money for? Paying down personal debt, helping a family member or a charity, splurging on a cruise?
  • Do you know how these decisions will affect your current finances, plus your retirement and/or estate plans?

First things first, start with the taxes

You may be facing some significant federal and/or state inheritance taxes. Ask a tax or financial advisor for help with this before receiving the money, if possible. You should be aware that life insurance proceeds are usually not taxed, nor is an inheritance from a spouse. You will, however, be facing capital gains taxes on non-retirement assets when you go to sell them. The rules are complex and they vary. Let your advisor know the details.

Distributions from an annuity, IRA or other traditional retirement account that you inherit will mean paying some taxes. Caution though: if you cash out an inherited IRA and then deposit it into your own IRA, you will owe taxes on the entire amount of the rollover. Ask your advisor how best to handle these situations.

Don’t have a plan for the money yet?

A wise way to handle your incoming inheritance is to “park” the money in an FDIC-insured money market account or use a three-month CD for now. Keep in mind that even though your inheritance is considered separate property from your spouse’s, if you deposit the money in your joint checking account, you are commingling the assets and could face loss of protection down the road if there is a divorce.

What next? Pay off the house, the credit cards, take a trip?

So often the first impulse is to rush out and pay off the mortgage on the house. That may well be a good idea, but do you have other debts that should be paid off first? These might include car loans, personal loans and credit card debt, which all have higher interest rates than your mortgage. What next? Perhaps you have always wanted to invest in the stock market and never had the opportunity until now. Or you would like to send a child to a four-year college rather than a two-year. Or take that trip.

Answer this first: how can the inheritance help with your long-term financial goals?

Be sure to keep in mind your own retirement and plans for your estate. Perhaps due to the recent economy you haven’t been able to fund your retirement savings as you had hoped.

An equally important question is: what makes most sense to you personally? You may feel that a significant charitable contribution or helping out a relative who is struggling financially will be more worthwhile than paying down your own debt. Perhaps there are ways to be able to do both. Also, would setting up a trust or foundation be a worthwhile endeavor?

Don’t forget insurance

If you inherited any real estate, jewelry or artwork, for instance, check with your insurance professional. You likely will need to change your property and casualty coverage. And don’t forget, with a sizable inheritance comes increases to your homeowners and automotive insurance liability limits.

Last but definitely not least, be sure to save  aside six months of living expenses for emergencies.
This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. You should contact your tax professional to discuss your personal situation.


Tune in to “America’s Wealth Management Show” sponsored locally by Life Certain Wealth Strategies
Saturdays from 12 noon to 1 p.m. on news radio 630 KHOW.
Provided by courtesy of Herb White, MBA, CFP¨, a CERTIFIED FINANCIAL PLANNERª with Life Certain Wealth Strategies, 8400 E Prentice Ave, #715 Greenwood Village, Colorado, www.lifecertain.com, (303) 793-3999. Securities and investment advisory services offered through Woodbury Financial Services, Inc. Member FINRA, SIPC and Registered Investment Advisor. Life Certain Wealth Strategies and Woodbury Financial Services are not affiliated entities.

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