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What To Consider When Receiving An Inheritance

Receiving an Inheritance from a non-spouse individual


Receiving an inheritance can be a very emotional period. Not only are you coping with the loss of a loved one, but you also have to properly navigate a potentially major financial transition.   

You are likely to feel a sense of responsibility when receiving an inheritance, as that parent, relative or friend who left money to you trusted you to use and manage that money effectively. Therefore, it is important to understand the rules around inheriting different types of assets.

With an estimated $68 trillion expected to change hands by 2030, there is a lot on the line. 

So, what are common types of accounts you can expect to inherit?

  • Bank accounts
  • Retirement accounts (IRA’s, 401k’s, 403b’s, etc.)
  • Trust accounts
  • Brokerage accounts (non-retirement investment accounts)

First, a word about probate. Probate is the legal process of administering someone’s estate. Certain assets will avoid the probate process, such as those in trust, with beneficiary designations, or jointly owned. Assets that are not accounted for in any other way, or are only accounted for in a will, will have to go through the probate process. In either case, the executor of the estate will play an important role in distributing assets to beneficiaries.

Now, lets explore some important things to understand when inheriting different types of financial accounts.

Inheriting a Bank Account

Money in the bank is the simplest type of asset to inherit as it is simply cash. There are no investments to be concerned about or rules to be aware of. The executor of the decedents estate will have to inform the bank of the account owners passing to get the process going.

If you are listed as a beneficiary, under what is called a “Transfer on Death” designation, then your share will be directly distributed to you to do with what you wish.  

If you are not listed as the beneficiary, but you are the heir in the will, then the accounts will have to go through the probate process. Once that process is complete, you will receive your share of the bank accounts that you are entitled to.  

Inheriting Retirement Accounts

Things start to get complicated when inheriting retirement accounts. You are now dealing with investments and distribution rules imposed by the IRS.

If you are listed as a beneficiary on a person’s IRA, then you will need to open an Inherited IRA account in your name to receive your share of the account. The administrator of the decedent’s estate will inform you that you are a beneficiary, if you were not already aware.

There are 3 important things you need to be aware of when receiving an inheritance from a retirement account:

  1. Investments – You may receive cash or investments into your Inherited IRA. In either case, you should review the account holdings and make any necessary changes to create an investment portfolio that is appropriate to your financial situation. The sale of an investment in a retirement account is a non-taxable event, so do not be concerned about selling investments with large gains.
  2. Required Distributions – Per IRS rules, if you inherit an IRA account after January 1, 2020 then you are required to distribute the entire account within 10 years of the original account owners passing. There are certain exceptions to this rule that only apply to a small group of people.
  3. Taxes – If you inherited a “Traditional” IRA, 401k or other type of pre-tax retirement account, then the distributions that you take from your Inherited IRA will be taxable to you as ordinary income. If you inherit a Roth IRA, then luckily the distributions you take are tax-free. Because there is flexibility as to when you take the distributions within the 10-year period, there should be tax planning and coordination in order to make your distribution strategy as tax efficient as possible.

Inheriting a Brokerage Account

A brokerage account is a non-retirement investment account. You may have heard this type of account referred to as a “liquid” account or “non-qualified” account.

If you inherit a brokerage account that contains investments, then you are entitled to receive a step-up in cost basis. The cost basis impacts the tax consequences when selling an investment.

Rather than maintaining the original owners cost basis, the step-up rule allows for the cost basis to be adjusted to the date of death valuation of the investment. The use of this rule can amount to some serious tax savings when you decide to sell the investments!

Remember that you are not taxed on withdrawals from a brokerage account, but you are taxed upon the sale of an investment at either short-term or long-term capital gain rates depending on the holding period.

Inheriting a Trust Account

Trust accounts may come with an entirely different set of requirements. Although a trust account is a form of a non-retirement account, it is specifically designed by the person who created it in order for the money within the trust to be used in a manner that they see fit.

If you inherit money through a trust, then you will need a copy of the trust document in order to understand what you are and are not allowed to do with the money. You may be able to access this money free of restrictions, however there may be certain rules in place that you must adhere to.

For example, you may only be allowed to withdrawal a certain amount of money from the trust per year with the approval of the trustee, who may or may not be you.

Final Thoughts

As stated at the beginning, receiving an inheritance can be an emotional and overwhelming time period. Therefore, the best move you might be able to make initially is just to take a step back and process the situation before you start getting into the thick of financial issues.

And because this can be a significant financial transition in your life ensure that you are navigating it in the most prudent way possible and know what is required of you moving forward. If it is all too overwhelming to handle on your own, then seek out assistance from a financial professional who is knowledgeable about handling an inheritance. Schedule a call today to learn how Crest Wealth Advisors can help you navigate this tricky time period.

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Jason Dall’Acqua, and all rights are reserved.