Weighing the Pros and Cons of an Inheritance
Accepting an inheritance is a free and voluntary act that is also affected by personal circumstances. If you were informed that you have an inheritance coming your way, you will have to decide whether to receive or reject it. Here are some factors that may impact your decision:
●Outstanding debt.Your inheritance could include a big ticket item, such as a house, car, or RV, that carries outstanding debt. As the inheritor, you may beresponsible for servicing the loan or mortgage and will have to figure out if you can afford to pay it off or refinance and continue making the payments.1You could always sell the item, but if more than one heir inherits a home, that wouldhave to be a group decision. Also, keep in mind that real estate and other valuable property will need to be insured, at added cost to you.
●Oversized items.You could inherit a car, truck, RV, or other large item or collection that comes with no debt obligations but poses a storage problem. This is particularly true if you do not have your own home or if you live in an apartment or condo with limited space. Paying for additional storage is an option, but if you do not really want the item in the first place, storing it may not be worth the cost.
●Logistics.Taking possession of an item might sound good in theory but turn out to be a logistical nightmare. You might have to travel a long distance and pay for a trailer to haul it. Shipping may be an option, but who will pay for the transport? The money could come out of the estateor out of your own pocket.
●Tax consequences.Six states impose an inheritance tax on beneficiaries: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.2 In addition to a potential inheritance tax, which ranges from 1-20percentof the value of the assets you inherit3, income-producing assets such as real estate, securities, and retirement accounts can increase your taxable income and could even place you in a higher tax bracket. Be clear on the tax implications of your inheritance and how inherited assets may affect your overall financial situation.
●Personal considerations.Perhapsyou just do not want to take possession of an item that somebody left to you in their will. You may also realize that somebody else in the family really does want it and would feel hurt if you got it instead. Inheritances can produce hurt feelings and irritate existing tensions. To squelch conflicts before they get out of hand and lead to legal disputes, consider taking the high road.
Whichever path you choose—acceptance or refusal—be prepared to file documents stating your intentions. Another thing to keep in mind is that if you refuse an inheritance, you will have no say in who receives it. If the will does not name a backup (contingent) beneficiary, it will pass back to the estate and on to the next beneficiary according to state law. To make sure that a specific person receives what you are rejecting, you have the option to accept it and then gift it to them. However, as the giver, giving a gift comes with possible tax implications.
Managing Your Inheritance and Planning for the Future
An inheritance could be a pleasant surprise, but most people expect to receive an inheritance at some point in their life. Whenever that day comes, you will wantto make the most of your inheritance. Working with a trusted advisory team can help you assess your finances, preserve your wealth, plan for the future, and establish an estate plan of your own. For wealth and estate planning advice, reach out to our office to schedule an appointment.
We also have an office in Tucson, AZ.
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1Victoria Araj, Inheriting a House with aMortgage, Quicken Loans (Sept. 17, 2021), https://www.quickenloans.com/learn/inheriting-a-mortgage. 2Anna Hecht, Millennials Will Inherit $68 Trillion by 2030—Here’s What to Know If You Receive a Windfall, CNBC: Make It (Jan. 16, 2020), https://www.cnbc.com/2020/01/16/receiving-an-inheritance-four-things-experts-say-you-should-know.html.3What Are Inheritance Taxes?, Intuit TurboTax (Oct. 16, 2021), https://turbotax.intuit.com/tax-tips/estates/what-are-inheritance-taxes/L93IUc3sC.
(This is informational only and is not intended to be legal advice.)