Financial Considerations for an Inheritance
Originally published 5/24/2010 at the Financial Planning Association's All Things Financial Planning Blog
Robert Schmansky, CFP(r)
Receiving an inheritance can be one of the most emotionally charged situations concerning money. It is a memory of our loved ones, a symbol of their feelings for us, as well as their wish to enhance our financial security.
In today’s volatile market and low interest rate environment, many people are conflicted about what to do with this gift. Leaving a cash inheritance in a low-yield account just does not seem right. Likewise, you may be tempted not to sell stock gifts. Yet, a large stock position adds volatility and risk to a portfolio, and often creates an imbalance in your holdings.
Although it is only right to think about these funds in a special way, it is wise to consider your options before simply leaving them be.
When you receive an inheritance, it is important to remember that money is a tool. These funds were used for specific purposes during another person’s lifetime. Chances are, their purpose is not the same as yours, and how their place in your own plan may mean placing the funds in a better tool for you.
Spend some time considering alternative strategies for the funds and reviewing your portfolio. Do you need the money to meet short-term or emergency needs? If so, the best choice with a stock gift is to sell to fund this need.
Even if no immediate situation requires the money, a stepped-up basis makes it beneficial to sell stock and place it in a diverse portfolio. No matter how long this stock was held, your tax consequence is likely to be minor and will be considered a long-term gain or loss.
If you have longer term plans for the money, a further review with your financial advisor is definitely in order.
If you received non-retirement money and are not maximizing retirement savings, consider increasing your current year deductions and consume the cash. While you may prefer to keep the inheritance account intact, keep in mind money is money, and that your gift is simply shifting accounts; not so different than moving a wallet from one pocket to another.
With an inherited retirement plan, make sure not to tie up in long-term investments the amounts you will need to withdraw. Spousal beneficiaries should often roll over an IRA into an account in their own name.
Not lost in these suggestions are the emotional considerations. But keep in mind that someone wanted this gift to be a part of your life, and would certainly hope you use it wisely for your ends.