What Should I do with Inheritance?

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Over the next decade, millennials are expected to get over $68 trillion in term of inheritance from their baby boomer parents, according to an Oct. 2019 study from real estate firm Coldwell Banker.

If this prediction holds true, millennials will have five times the wealth they have today by 2030.

If you’re one of the lucky ones expecting to take over a portion of your parents’ wealth, whether by inheriting property with siblings or a cash lump sum, here are four things money experts want you to know about inheritance taxes and managing your newfound wealth, as well as advice on how to avoid spending too much of your trust, too fast.

What Should you do with Inheritance?
What you Shouldn’t do with Inheritance
How do you Manage an Inheritance?
How does Inheritance Money work?
Do you have to Report Inheritance Money to IRS?
What to do With Small Inheritance
How do You Receive Inheritance Money?
What is Considered a Large Inheritance?
What to do With 50k Inheritance
What to do With 70k Inheritance
What to do With 500k Inheritance
What to do With 400k Inheritance
What to do With 800k Inheritance
What is The Best Thing to do With an Inheritance?
How Does IRS Find Out About Inheritance?
Do I Have to Declare Inheritance Money?
Is it Better to Inherit Stock or Cash?
What is The Average Inheritance?
How Much Can You Inherit Without Paying Taxes?
What Happens When You Inherit Money?
Can You Still Claim Benefits if You Inherit Money?
How is Inherited Property Taxed When Sold?
Do You Have to Pay Taxes on Stocks You Inherit?
What is The Holding Period For Inherited Property?

What Should you do with Inheritance?

1. Be intentional about how you use your inheritance

What would you do if you won the lottery? This is a commonly asked question for those fantasizing about the financial future. But receiving an inheritance can also feel like you’ve just won the lotto.

For some, gaining sudden wealth could mean finally being able to buy a home, pay back student loans, save for retirement or start a business. For others, it could mean achieving financial freedom for the first time in their lives.

No matter your financial goals, the most important thing is to be intentional about how you use your inheritance, Douglas Boneparth, president and founder of Bone Fide Wealth, said.

“Inheriting a lot of money can help you achieve financial independence a lot sooner, but that’s only if you have the discipline to not overspend and prematurely deplete your windfall,” he says.

2. Pay attention to taxes

Whether or not the money you inherit will be subject to an inheritance tax “depends on the relationship of the relative and which state you live in,” says Ryan Marshall, a certified financial planner at Ela Financial Group.

An inheritance tax is a state tax that you pay when you receive money or property from the estate of a person who has died. Unlike an estate tax, this tax falls on the beneficiary to pay.

As of 2019, just six states in the U.S. impose this tax, Turbotax reports, so while it is fairly rare, you’re going to want to know if it applies to you and the money you have coming.

The six states that collect an inheritance tax are: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Each state has its own set of inheritance tax rules, exemption amounts and rates.

Take New Jersey, for example. “New Jersey has an inheritance tax that ranges from 11% to 16% based on your relationship to the decedent,” Marshall says.

“Immediate family members in New Jersey are considered Class A and they can inherit without paying this tax. However, Class D beneficiaries, such as nephews, cousins or aunts, do pay the tax.”

3. Managing your money should still be top of mind

You should still be stringent with budgeting and keeping track of your spending even if you end up inheriting a large sum of money, experts say.

That’s because the large number of Americans who lack financial knowledge and aren’t succeeding at financial planning put the odds against you, says Carol Fabbri, a financial advisor in Conifer, Colorado.

In 2018, nearly half (44%) of Americans didn’t have enough cash to handle a $400 emergency, and in 2017, just 6% of Americans managed to pass a financial literacy test administered by financial services company Financial Engines.

“Most of us aren’t taught how to manage money, there are lots of bad ideas out there and we are literally hardwired to make poor money choices,” Fabbri says. “Gaining an inheritance is a great opportunity to change your life, so take the time to learn about investing or find someone trustworthy to help you.”

Deciphering how and where to put your trust “is specific to the person inheriting the money,” Boneparth says. “If it is more money than you need to meet your current financial needs, investing could certainly be a smart thing to do.”

If you aren’t sure how to best manage the money you’ve inherited, “seek advice from a financial professional” who can help you to take inventory of your current financial state as well as your future goals, says Malik S. Lee, an Atlanta-based certified financial planner at Felton and Peel.

Should you choose to manage your money independently, accountability is key. One way to keep a tight grip on your spending is to track all of your expenses for one month.

At the end of 30 days, if it seems you’re unnecessarily overspending in one area, that could be a place to cut back — especially if your newfound wealth is causing you to buy more than you normally would.

4. Don’t spend it all at once

You’ve likely heard that you “shouldn’t spend your money all in one place.” This logic rings true when it comes to your inheritance as well.

The tendency to overspend can become a very real problem. In the U.S., 79% of people have issues keeping their spending within their budget’s parameters, and the average American admits to spending $7,429 over their budget annually, according to a 2019 poll from Slickdeals.

“There is no amount of money in the world that can fight off uncontrollable spending,” Lee says. “We have seen some of the richest people in the world go broke and every time you peel back the onion, spending is usually the root cause of the problem.”

Take former NBA star Shaquille O’Neal, for example. He blew through $1 million within 60 minutes of signing his first-ever professional contract, buying fancy cars and jewelry.

One way to keep from spending too much too fast is to consider the sacrifice and hard work that likely went into earning the money you’ve been given.

“What inheritors don’t understand is the sacrifice and commitment the person made over the years to have that amount of money,” Marshall says. “If these inheritors knew what it took for the person who passed away, the inheritor may be less inclined to ‘blow’ the money.”

5. Don’t Rush to Switch Financial Advisors

Research suggests that 70% to 90% of people who inherit significant wealth immediately fire the financial advisor who worked for their parents. But losses can soon follow.

The advisor you inherited along with the money either helped your parents get rich or at the very least helped them stay that way. When heirs talk to new advisors they are almost always encouraged to make a change.

The usual result? The disappearance of the inheritance. These facts suggest that young heirs should think carefully before discarding the advice and wisdom that helped their parents amass a fortune.

6. Leave Something for Your Heirs or Charity

Your inheritance is a blessing that if well managed, can make a lasting positive impact on your life. If you can, continue the legacy by making plans to bequeath a nice inheritance to your heirs or favorite charities.

To make sure you do justice not only to what you have received but to the generations that will follow, keep in mind that, in terms of longevity, inherited wealth has a bad track record.

Some 70% of that wealth is lost by the second generation and 90% is gone by the third generation.

If you’re lucky enough to inherit a nest egg that somebody else worked hard to build, you can honor your benefactor and delight your heirs by being a good steward of what you have received. No matter how large or how small your inheritance, manage it with care and pay it forward.

7. Make Investing a Priority

Once you’ve taken care of your debts, it’s time to invest. Acting on the “pay yourself first” principle, you can put your newfound wealth to work. By investing your inheritance you give it an opportunity to grow.

Your financial advisor will be able to help you invest wisely. The best thing to do for most people⁠—they will probably echo this sentiment⁠—is to invest widely in a large basket of funds that offer a solid return over time. It is considered safe, and often the smartest investment for young people with an inheritance.

What you Shouldn’t do with Inheritance

If you are receiving an inheritance, here 5 things you shouldn’t do with the money:

1. Start Making Decisions Immediately

It’s tempting to immediately begin spending the money, making decisions about paying off debt, buying a new house, investing it in the hottest commodity, or taking an awesome vacation.

However, this can lead to blowing through the money fairly quickly. Instead, step back, and evaluate the situation. Don’t make any money decisions immediately.

2. Spend Without a Plan

In order to make the best of your inheritance, you need to create a plan. Keep your money in a safe place (a protected bank, or short-term GICs), while you formulate a plan.

Think about your priorities, and figure out how you can get the most bang for your buck. Put together a good plan for your inheritance money so that you can continue to use it to grow your wealth, rather than risk losing it all.

3. Decisions on Your Own

Your first instinct might be to get involved with DIY financial solutions. After all, you don’t want fees and costs eating away at your money. However, this can turn out to be costlier in the long run.

In some cases, you just don’t have the expertise and know-how to navigate some of your options. Plus, you might not understand how to use tax planning to reduce the government’s cut.

Other considerations that can impact what happens with your money include possibility of divorce, and if you are guardian of a minor who has received inheritance money. These are issues that require careful, expert thought, and you don’t want to go wrong with DIY decisions.

It can help to meet with a knowledgeable financial planner. There are plenty of qualified (and low-cost) financial professionals who can help you map out a plan for your inheritance money.

4. Pass It On Without Securing Your Own Future

There are plenty of recipients who feel as though they should pass on their good fortune by donating to charity, or by giving some of the money to their kids. However, before you do that, remember one of the basic rules of personal finance: Take care of yourself first.

If you have debt, or if your RRSP isn’t properly funded, now is not the time to send your money on to your kids, or to someone else.

Instead, with the help of a financial planning expert, make it a point to get your own finances on the right track with the inheritance money. After that’s done, you can consider giving the money away.

5. Keep It All for Later

While you want to do the right thing with your financial windfall, you don’t have to save it all for later. While you don’t want to get crazy by purchasing a fancy car or remodeling your house, you can take a little of the money and use it for something fun.

Consider a weekend getaway, or a spa day, or a gym membership. You can also reward yourself and do something that you really enjoy.

How do you Manage an Inheritance?

A sizeable inheritance can represent a life-changing opportunity. Here are six tips to help you prudently manage your windfall.

1. Consult With a Financial Professional and Tax Professional

Depending on the type of inheritance (e.g., investments, life insurance, retirement account), you could be dealing with substantial federal and/or state inheritance taxes.

Working with a financial advisor and/or a tax professional could help you plan the sale of any assets and deal with the tax implications.
• If your inheritance was from your spouse, there may be no taxes due.
• Life insurance proceeds are usually tax free.
• Non-retirement assets are taxed when sold, and those assets typically receive a “step up” in cost basis.

That means that any capital gains tax you owe will be based on the asset’s fair market value at the date of death of the benefactor.

If you inherit an annuity or traditional workplace retirement account or IRA, you will have to pay taxes on the distributions. Be very careful when taking your distributions.

For example, if you cash out your uncle’s IRA and roll the money over into your own IRA, the entire amount of the rollover will be subject to ordinary income taxes. Note too that there are considerations for spouses rolling over their deceased spouse’s retirement account.

2. Park the Cash

Before you make any plans or major purchases, stop. Deposit the inheritance or investments in a bank or brokerage account. If you are married, you need to determine whether to put the account solely in your name or jointly with your spouse.

Note that inheritances are considered separate property, in case of divorce. However, once they are commingled in a joint account, those assets lose that protection.

3. Cut Down/Eliminate Your Debt

Your inheritance may allow you the ability to pay off your debt, including your mortgage. But first consider paying off those loans with higher interest rates, such as credit cards, personal loans, and car loans.

Then consider paying off your mortgage. Also fund an emergency account with at least six months’ worth of living expenses.

4. Think About Your Other Goals

Identifying your financial goals can help you determine what types of investments to make or other types of accounts to open. These goals could include:
• Contributing to charity
• Setting up a trust or foundation
• Paying for a family member’s education
• Helping out loved ones
• Adding to your retirement savings

5. Review Your Insurance and Estate Planning Needs

If you’ve inherited a significant sum, it may be wise to increase the liability limits on your homeowners and automotive policies. If you inherited jewelry, artwork, or real estate, you may need to increase your property and casualty coverage.

Consider an umbrella policy. Does the inheritance inflate the size of your estate so that it will be subject to estate taxes? Are you thinking about setting up a trust to provide for family or charity?

6. Do Something Nice for Yourself

Set aside a small percentage — no more than 5% to 10% — of your inheritance for “splurges.” Take a trip. Buy a new car.

Just be sure to keep it small. After all, inheritances don’t grow on trees.
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.

How does Inheritance Money work?

The 2018 Survey of Consumer Finances (SCF) found that the median inheritance in the U.S. is $69,000. Yet an HSBC survey found that Americans in retirement expect to leave nearly $177,000 to their heirs.

As it turns out, the passing of property and assets doesn’t always go as expected or planned. Plus, though it may seem like a windfall, getting an inheritance is rarely as easy as depositing a check. Read on to learn exactly how inheritance works.

How Inheritance Works When There’s a Will

When someone dies and there is no living spouse, survivors receive the estate through inheritance. This is usually a cash endowment given to children or grandchildren, but an inheritance may also include assets like stocks and real estate.

Asset distribution is determined during the estate planning process, when wills are written and heirs or beneficiaries are designated.

The will specifies who will receive what. To distribute everything evenly, one can simply list beneficiaries. If certain items are to be left to certain people, that must be spelled out in the will. For the inheritance process to begin, a will must be submitted to probate.

The probate court reviews the will, authorizes an executor and legally transfers assets to beneficiaries as outlined. Before the transfer, the executor will settle any of the deceased’s remaining debts.

How Inheritance Works When There Isn’t a Will

Inheritance becomes more complicated if the deceased did not outline asset distribution before death. In that case, a probate court must determine the wishes of the deceased as best it can.

The probate court will check to see if the deceased named beneficiaries on stocks, bank accounts, brokerage accounts and retirement plans. Real estate, jewelry, heirlooms and other property can be more difficult to allocate.

Once the plan is established, the court will appoint an administrator to act as executor and disseminate the assets. This process can take months or years to settle.

When an Inheritance Has Restrictions

If you are on the receiving end of an inheritance, be sure to read the fine print. The will writer can specify that the amount is paid in small installments rather than in one large sum.

He or she can also restrict the inheritance to certain uses, like education. Depending on the terms of the will, you may only receive the money when you reach a certain age or a milestone, like college graduation or marriage.

Are Heirs Responsible for the Debts of the Estate?

Though creditors may attempt to collect debts from the deceased’s family members, they are not directly responsible for them.

The executor of the will or the administrator pays any estate debts before distributing what remains of the estate. So as an heir, you aren’t personally responsible for those debts and you should point creditors toward the estate.

Where There Are Inheritance Taxes

While there is no federal inheritance tax, six states impose inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. In all of these states, a spouse is exempt from paying inheritance tax.

Children and grandchildren are exempt from inheritance tax in each of the states except for Pennsylvania and Nebraska. Exemptions vary by state for siblings, aunts, uncles and sons-in-law and daughters-in-law. You will likely face higher inheritance tax rates if you aren’t related to the deceased.

Where there is an inheritance tax, the tax rate depends on such factors as the state, your relationship to the deceased and the amount you inherited. Rates range from 0% up to 18% of the value of the inheritance.

Inheritance tax is often discussed in relation to estate tax. These are two distinct taxes. The beneficiary pays inheritance tax, while estate tax is collected from the deceased’s estate.

Assets may be subject to both estate and inheritance taxes, neither of the taxes or just one of them. Maryland and New Jersey are the only states that collect both estate and inheritance tax.

In those states, inheritance can be taxed both before and after it’s distributed. Of course, state laws change regularly. It’s always important to double check with your state tax agency and maybe even an estate lawyer.

Inherited lump sums aren’t considered income. However, you could pay taxes on assets that create income. If you inherit stocks, real estate or other items that appreciate, you may have to pay capital gains tax once you sell them.

The amount you’ll pay in capital gains tax is based largely on the amount of profit you make, using the value at the time of inheritance as your cost basis.

If you inherit a retirement account, you’ll have to pay income taxes on distributions. Inherited Roth IRAs, however, are tax free, as are life insurance proceeds.

Coming into a large inheritance doesn’t guarantee financial security. Without a plan, it’s very easy to blow a windfall. The sudden rush of money is known to spark lifestyle inflation and irrational behavior.

Beneficiaries are sometimes in worse financial shape after inheritance than before. If you’re set to inherit a sizable chunk of change, be realistic about the amount you’re inheriting, assess your current financial situation, consider your goals, establish boundaries and spend thoughtfully. Debt repayment and investing should be top priorities.

Do you have to Report Inheritance Money to IRS?

You could potentially be liable for three types of taxes if you’ve received a bequest from a friend or relative who has died: an inheritance tax, a capital gains tax, and an estate tax.

An inheritance tax is a tax on the property you receive from the decedent. A capital gains tax is a tax on the proceeds that come from the sale of property you may have received.

And finally, an estate tax is a tax on the value of the decedent’s property; it’s paid by the estate and not the heirs, although it could reduce the value of the inheritance

Taxes at the Federal Level

The Internal Revenue Service (IRS) really only cares about any capital gains tax you might end up owing. The federal government doesn’t impose an inheritance tax, and inheritances generally aren’t subject to income tax.

If your aunt leaves you $50,000, that’s not considered income so the cash is tax-free—at least as far as the IRS is concerned.

State Inheritance Taxes

You probably won’t have to worry about an inheritance tax, either, because only six states collect this tax as of 2019: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

If the decedent lived or owned bequeathed property in any of the other 44 states, you can collect your gift free of an inheritance tax—even if you live in one of these six states.

Property passing to a surviving spouse is exempt from inheritance taxes in all six of these states, and only Nebraska and Pennsylvania collect inheritance taxes on property passing to children and grandchildren.

State Income Taxes and Federal Income Taxes

You won’t have to report your inheritance on your state or federal income tax return because an inheritance is not considered taxable income. But the type of property you inherit might come with some built-in income tax consequences.

For example, if you inherit a traditional IRA or a 401(k), you’ll have to include all distributions you take out of the account in your ordinary federal income, and possibly your state income as well.

The Capital Gains Tax

This tax is applied to the difference between the value of an asset and the amount you sell it for. If you sell it for less than its value, this is a capital loss and no tax is due. If you sell it for more than its value, however, you’ll be taxed on the gain.

Fortunately, the long-term capital gains tax rate is typically kinder than the tax brackets that individuals are subject to on their incomes, and inheritances qualify for the long-term rate. Plus, your inheritance receives a “stepped-up basis” to the date of the decedent’s death as well.

For example, you might inherit a house that’s valued at $250,000 on the decedent’s date of death. You then sell the property for $275,000 a few years later. You would owe long-term capital gains tax on $25,000.

Even if the decedent purchased the property decades ago for $100,000, your gain isn’t calculated using this number. It’s stepped up to the value of the property as of the date of death, which typically results in less of a taxable profit—$25,000 as opposed to $175,000 using a sales price of $275,000 in this scenario.

State Estate Taxes and Federal Estate Taxes

State and federal estate taxes might also come due. The good news here is that the 2019 federal estate tax exemption is $11.4 million. An estate won’t owe any estate tax if its value is less than this.

But 12 states and the District of Columbia also collect an estate tax at the state level as of 2019. These states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.

Otherwise, the value of the estate must exceed the state’s estate tax exemption before any state estate taxes will be owed. Unfortunately, these exemptions are typically much less than the federal exemption. For example, it’s only $1 million in Oregon and in Massachusetts as of 2019.

If the estate owes state estate taxes, these taxes must be paid before you can receive your inheritance. The amount that you receive will most likely already have been reduced by the taxes that were due.

There are many misconceptions about taxes and inheritances. Consult with an estate planning attorney or an accountant long before your tax return is due if you’re not sure if you’ll have to pay taxes on inherited property.

What to do With Small Inheritance

1. Invest It

Investing an inheritance could take several forms, and beneficiaries could mix and match according to their means to build some ongoing wealth and residual income. You could parcel the entire sum out into different investment accounts, set it on autopilot until your retirement and let the power of compound interest multiply the initial amount.

If you know how to invest in real estate, or you know someone with experience who can help you, you might consider purchasing a rental property or two. You could also use a portion of your inheritance to invest in a startup or open a franchise.

Be forewarned, however, that if you spread the word around that you’ve inherited money you may get several solicitations from less than scrupulous individuals who need money for risky schemes. Remember to invest your wealth wisely and seek counsel from a lawyer or experienced, impartial party before making any moves.

2. Give Back

If there was a particular cause or organization for which the deceased felt some affinity, you might consider propitiating their memory with a special gift—which in most cases, will also be tax deductible. This could be a charity, religious organization, or recreation center looking for contributions or donations to expand their work.

Many organizations have naming opportunities so that the name of the deceased can be associated with this act of kindness. If no such cause exists, you could use part of the inheritance to start a trust for charitable works or a scholarship in their name. Remember to account for your other financial goals when determining how much to donate.

3. Pay off Debt

Debt comes in many forms: big and small, high interest and low interest. In most cases, it will benefit you the most to pay off the debt with the highest interest rates. For most consumers, this is credit card debt.

If you have a sizable amount of credit card debt and your income will preclude you from having it waived in bankruptcy court, you might consider using some of the inheritance to clear your outstanding balances, or pay off some of them for the purpose of consolidating them into a lower payment.

Other debts might include student loans, car loans, and anything else outstanding, the payments of which add to your monthly expenses. You will find that once these debts are cleared up, it’s not only easier to build your wealth with monthly contributions to your IRA, but that a huge, stress-inducing pressure will leave you breathing easier.

4. Enjoy Some of It

The key word here might be “some.” While you won’t want to blow all of your inheritance on a series of exotic vacations, it’s okay to use some of it to achieve one of your own personal goals. This might include obtaining a higher degree or certification, buying a motorcycle, or taking a special vacation.

Remember that the deceased would most likely want you to enjoy life responsibly. This tip is most practically utilized once you have checked some other points off your to-do list (such as paying down debt).

For many families, creating an emergency fund or savings account comes at the expense of taking an annual vacation or pursuing other goals. The extra money from an inheritance can provide an opportunity to check some items off the proverbial bucket list without dipping into your emergency fund, savings account, or Roth IRA.

5. Plan for retirement

The average American has a woefully low-funded retirement account. Receiving an inheritance can be your heretofore neglected opportunity to jumpstart a new IRA or boost the amount in an existing IRA. With taxable income reduced by the income tax rate, the rise of inflation, and stagnant wages, it can be hard for the average American family to put aside money from their income toward retirement.

But an inheritance put in the hands of a trusted financial planner or deposited into the right IRA can form the initial stages of what will eventually snowball into a sizable nest egg. In light of the deceased’s passing, it may only be fitting to consider your own advanced planning and preparations for the years when you can no longer work.

6. Pay off Your Home

For most Americans, the largest debt they carry is their mortgage. An outstanding mortgage is also something that many Americans carry into retirement, which can significantly impact their ability to enjoy their golden years with financial ease.

At the same time, some beneficiaries will receive an inheritance large enough to pay down the remaining amount they owe on their home. Owning your home outright can provide you with a significant amount of financial independence, increase your net worth, and reduce the monthly stress of having to pay your mortgage.

7. Start a College Fund

Saving is difficult for most Americans, even when it means contributing to their retirement accounts or emergency fund. Saving up money to pay for a child’s college tuition can become an additional source of stress. But if an inheritance comes your way, it can provide an excellent starting amount for a college fund.

Invested in the right mutual fund, this amount can grow into a six-figure sum by the time you need to pay for one or more of your children to attend a four-year institution. Helping you children graduate debt-free will certainly give them an advantage as they start their journey into adulthood and would certainly be in the spirit of using a gift from the deceased to help family.

8. Get Help Managing It

Inheritance money issued as a lump-sum distribution can become diminished by inheritance taxes. Inheritance tax rates do vary by state (although the federal estate tax does not) but no matter where you live, working with a certified financial planner or an estate planning attorney can help minimize losses to inheritance tax.

If the health insurance policy of the deceased carried a death benefit, or if they had life insurance, there may be more lump sum payouts that would benefit from the stewardship of a financial advisor who specializes in estate planning.

Moreover, if a beneficiary like a spouse inherits real property and doesn’t want to live there, an estate planning attorney with a good working knowledge of estate taxes can help develop a strategy and minimize losses to capital gains. They can also help reduce other capital gains taxes that might be triggered by liquidating other types of assets belonging to the deceased.

9. Don’t Let It Change Your Life

It’s easy for people who have suddenly obtained a large inheritance to change the way they live their life. They may quit their job, move to a different place, and start spending more just because they came into a lump sum of money.

While this type of behavior is reckless and shortsighted any time, it can be especially dangerous in the emotional aftermath of losing a loved one, when beneficiaries might be more inclined to make poor choices.

Consult with a lawyer or financial planner who can help you make the right choices with your money and avoid making any drastic changes that might provide a further disturbance in delicate and often emotional times.

10. Share It With Family – Within Limits

There are two sides to the coinage of helping family. On the one hand, it is certainly altruistic and noble to use the inheritance to help family members in need. These can be short-term gifts like paying for a niece or nephew to have a birthday party, or gifts with a long-term impact like bailing a relative out of foreclosure, or helping a surviving spouse with long-term care.

This can be especially true if there are certain family members who had a less-than-perfect relationship with the decedent, who consequently did not leave them any inheritance. But remember to use discretion and avoid overspending.

Also, if word gets out that you’ve come into a sizable inheritance, you may find that relatives start contacting you for money—upsetting as it may seem. Learning how to develop good boundaries around giving money to relatives is a good skill at any time but can prove especially important following the death of a family member.

How do You Receive Inheritance Money?

If you suspect that there may be unclaimed money from deceased relatives available to you, you may want to do a search to find it. A search for unclaimed money may involve a bit of detective work, but the financial payoff can be worth it.

Unclaimed Assets

Potential unclaimed assets include bank accounts, bonds, certificates of deposit, dividend or payroll checks, life insurance policies, retirement accounts, safe deposit box contents, stocks, and securities and utility deposits that are held by financial institutions or holding companies.

The assets are considered abandoned or dormant if there has been no activity in the account for a period of time, commonly a year or more.

The holder of the property is required by law to contact the owner, yet often makes very little effort to do so. In cases where the owner has died, the holder may be unable to locate the heirs either because of an unreported address change or a name change after a marriage or divorce.

When the heirs fail to claim the property within a specified period of time (the dormancy period) it passes to the state’s unclaimed property division, a process known as escheat.

Searching for Unclaimed Money

It’s easy for individuals to search for unclaimed inheritance money, thanks to online databases.

The best place to begin your search is www.Unclaimed.org, the website of the National Association of Unclaimed Property Administrators (NAUPA). This free website contains information about unclaimed property held by each state.

You can search every state where your loved one lived or worked to see if anything shows up. It may be a good idea to search all 50 states and the District of Columbia.

You may find yourself directed to www.MissingMoney.com, where you can do a multi-state search. Also endorsed by NAUPA, this site lets you search for unclaimed property in participating states (which do not include CA, CT, DE, GA, HI, IL, OR, PA, WA, WY).

Don’t forget to click on the Links tab and search under Related Links. Here you’ll find links to the Financial Management Service, U.S. Savings Bonds, the IRS, the Pension Benefit Guaranty Corporation, Housing and Urban Development, Federal Deposit Insurance Corporation, and Department of Veterans Affairs, which will point you to additional searchable databases.

If you want to do a thorough search, don’t just search by one form of your loved one’s name. Many state databases require you to enter the name exactly the way it is in the system.

Try different spelling variations, add a prefix or suffix, search under the maiden name, or try using the first initial and last name. You might even want to try adding words like “Beneficiary,” “The Estate of,” “Payable on Death,” “Unknown Heir,” or “No Beneficiary.”

Using a Locator Service

There are services that offer to search for unclaimed inheritance money for you for a fee. Unless you have reason to suspect that there is a significant sum of unclaimed money out there or your loved one lived abroad, it makes more sense to conduct the search yourself.

NAUPA notes on its website that most abandoned accounts have very little money in them. If you do locate funds that belong to you, the state will walk you through the process on how to claim them. As a rule, all that is required is your Social Security number and proof that you are the rightful heir.

While it’s easy enough to search for unclaimed inheritance money yourself, there may be times when hiring a professional or an attorney who specializes in finding unclaimed property is worth the expense.

If you choose to hire a locator service to avoid the cyber searching and paperwork, don’t pay more than 10 to 20 percent of the amount of inheritance money that you expect to recover.

What is Considered a Large Inheritance?

A sum that can last one person a lifetime might last another just a few years, months or even weeks. “Large” is an entirely subjective term. Some consider a “moderate” inheritance to be a sum of $50K to $100k. And others might view a “large” inheritance to be anything above $100K.

A large inheritance is large enough that will impact your life for the better. But what you do with it, is what is important. Do not rush out and spend it all. Plan on how it will be put to good use, for your life. For example, investment, education, buying a home, car to get to work, health care, etc. There are many avenues, plan wisely.

What to do With 50k Inheritance

If you inherit a significant amount, such as $50,000, a strategy for wisely handling a windfall is likely to include making a long-term plan that considers your age and goals, starts with a well-stocked emergency fund and employs tax-advantaged investments if available. Consulting with a financial advisor is a great way to develop a realistic long-term plan and lay out some strategies for reaching your goals.

Over an eight-year period, one in five American households, including older workers, got an inheritance averaging $67,000, according to a 2006 research report. But most spend the money in a few years and have little left to show.

A decade after getting an inheritance, the typical heir still has just a third of the windfall, according to a Swedish study from 2016. Here’s how to make an inheritance last.

The first thing to do after receiving a sizable inheritance is to place the funds in a secure account, such as a bank savings account or money market fund, while you take stock.

Whether you do it on your own or with professional assistance, create a sensible plan for handling the inheritance. Start with your current circumstances. Consider your age, income, assets and debt. Factors like your personal risk profile, future obligations such as children’s college and personal goals such as business ownership come into play.

Note that inheritances are not considered income by the IRS, so you won’t have to pay taxes on the money you inherit. However, any interest or capital gains on investments you make with the funds could be subject to taxes.

Before making any long-term investments, creating a rainy-day fund is likely to be a priority. Loading a secure, easily accessed account with three to six months of basic expenses can provide peace of mind while avoiding the need to borrow or tap liquid funds in the event of an emergency.

Reducing high-rate debt could be next. Paying off revolving credit card balances will save more on interest than most investments can ever return. Getting into the habit of settling credit card accounts in full every month will prevent taking on more high-cost debt in the future.

What to do With 70k Inheritance

First pay off your debts if you have any, the interest on these is more likely to be greater than you’ll get on deposit accounts. If you have got a mortgage and the rate is more than you can get on deposit, see if you can pay off any of the capital to reduce your mortgage.

If you want to save the money, have a look at an ISA if you have not got one. Index linked certificates from NS&I are another option.

1 year fixed term saving account’s are paying 3.25% (6 month @ 3.02%), you can get more if you are willing to tie your money up for longer but risk loosing out if rates go up during the fixed rate period.

Instead of tying your money up for a year at 3%, you can get just below this (2.8% ish) with easy access savings accounts from the AA, Egg and Tesco’s (with a fixed bonus for a year).

What to do With 500k Inheritance

For an inheritance of $500,000 or larger, there are no off-the-shelf solutions that could address an individual investor’s unique needs, objectives, and investment profile. Before investing any money, it would be essential to have a personalized investment plan that considers your specific investment objectives, tolerance for risk, and investment time frame.

Studies show that investors with a well-conceived long-term investment plan generate returns better than those who don’t have a plan.

Here are the key elements of a sound, long-term investment plan:

Set well-defined goals and investment objectives:

Having a purpose for your money is important because it gives you the conviction to focus on doing the right things with your money. However, you still need clearly defined goals and investment objectives to guide your investment decisions. Setting goals is about translating your life ambitions into quantifiable and achievable financial targets.

Develop an asset allocation strategy:

Studies show that as much as 93 percent of a portfolio’s return is not determined by individual investments, but rather by the mix of assets inside the portfolio. So, the mix or allocation of assets is far more important than the selection of investments.

The key is determining which asset mix would produce the kind of returns you need to achieve your objectives within the constraints of your risk tolerance. Asset allocation is not concerned with choosing individual securities. Instead, it’s about selecting the right mix of assets with a weighting that conforms to your investment objectives and risk profile.

A younger person with a longer time horizon might have a higher risk tolerance than someone closer to retirement. The younger person might allocate more money to riskier assets that can generate higher returns. The older person might reduce his exposure to riskier assets to preserve capital for retirement. Your asset allocation may change over time as you get closer to retirement.

Practice diversification:

When investing, it’s virtually impossible to know at any given time when one asset class or asset subset will outperform another type of asset. The solution is to diversify your portfolio among various types of assets to capture returns whenever and wherever they occur.

Diversification reduces your risk exposure to any single asset that might drastically underperform. You can think of diversification as a method to control risk and volatility in your portfolio.

The key is to choose assets with a low correlation with each other. For instance, when stocks are performing well, bonds tend to perform poorly – and vice-versa. Within a stock portfolio, blue-chip stocks provide stability and dividend income, while small-cap stocks offer high-growth potential. Each of these assets can contribute positively to an investment portfolio,

Select your investments

If you are new to investing, your challenge is choosing from a vast universe of possible investments. Between individual securities, mutual funds, and exchange-traded funds (ETFs), you have thousands and thousands of investment choices.

With $500,000 to invest, your best options for developing the right asset allocation while achieving optimal diversification are index funds and exchange-traded funds (ETFs).

For many people new to investing, index funds and ETFs are popular because they offer instant diversification and professional management. You can choose from among different asset classes to create an asset allocation that conforms to your risk-return profile.

These funds invest in the different stock indexes, such as the S&P 500 or the Russell 2000 index, as well as different market segments, such as real estate, discretionary stocks, and energy stocks. Most have low management fees, which is essential to ensure you keep most of your money working for you.

What to do With 400k Inheritance

Here is what you would do in this order:

Pay off all debt. It’s not that much money and you’ll feel better being debt free.
Fully fund a 3-6 month emergency fund.
Buy yourself the house you want and set aside the money you will need to feel settled. I would put down enough money such that your monthly payments are 25% of your take home pay on a 15 year mortgage. Even better would be to make it such that your payments are 25% of take home pay on one income.
Fully fund both Roth IRAs.
Put the rest in a taxable investment account. You’ll have to ask someone else how to invest it because I’m not familiar with taxable investing and minimizing taxes.

What to do With 800k Inheritance

You should always do three things with money: give, save and spend. An inheritance is no different. And just like a monthly budget, it’s important to give every dollar of your inheritance an assignment.

We tell folks to use a pie-graph approach, which just means thinking about your inheritance as if it were a pie that you’re going to divide into slices. Now, how you slice up your money will depend on your unique situation and where you are in the Baby Steps. Here are some of the slices you might include as you decide what to do with your inheritance:

Give Some of It — No matter where you are in the Baby Steps, giving should always be part of your financial plan! Give 10% to your church or a charity of your choice.
Pay Off Debt — If you have any debt you’re trying to pay off, use part of your inheritance to fast-track your debt snowball. Eliminate as much debt as you can. If you can write a check and be debt-free tomorrow, do it!
Build Your Emergency Fund — Having three to six months’ worth of expenses saved in a money market account will help you deal with life’s big emergencies.
Pay Down Your Mortgage — Can you imagine having no more house payments? Using part of your inheritance to pay down your mortgage can move you closer to that finish line and save you thousands of dollars in interest.
Save for Your Kids’ College Fund — There are plenty of ways to cash flow college without using your inheritance. But if you’ve fallen behind on saving for your kids’ college fund, you could put some of your inheritance into an Education Savings Account (ESA), a 529 Plan, or a UTMA/UGMA (Uniform Transfer/Gift to Minors Act) to catch up.
Enjoy Some of It — It’s okay to set aside a small portion of your inheritance to have some fun, but the amount will vary based on where you are in the Baby Steps. If you’re in Baby Steps 1–3, it should be less than if you’ve got retirement taken care of and have more margin. Remember, you want to use this money wisely!

What is The Best Thing to do With an Inheritance?

When you are ready to make some decisions, they should be made within the parameters of a comprehensive financial plan.

Here are some of the options to consider.

1. Pay Down Debt

Freedom from debt has so many payoffs it’s always an excellent option. Not only are you free from the weight of what you owe, the amount saved in interest often makes debt repayment a better (and safer) return on investment than the investment market.

Paying off a $10,000 credit balance that charges 19.99% interest can save you up to $1,999 a year, about triple what you could hope to earn on a $10,000 investment in stocks and bonds in one year. Start by paying your highest interest credit card debts and then move to car loans, bank loans and mortgages.

Freedom from debt goes beyond your financial well-being to your emotional well-being as well. Eliminating debt lifts an emotional weight off your mind. Debt stress affects self-esteem and creates tension in relationships. Using your inheritance to eliminate this burden is a smart choice.

2. Establish an Emergency Fund

Three to six months of living expenses is the typical recommendation for an emergency fund. There should be enough to keep you and your family afloat in the case of a job loss, illness or other unforeseen impact on your income.

But how many people are able to actually put this amount aside? It can be challenging. A substantial inheritance can allow you to create, or top-up, this important financial buffer.

3. Fund Your Retirement

Take time to review your retirement plan. Is there a shortfall between your projected income vs. expenses? An inheritance is a good opportunity to fill in the gaps, especially if you have room in your RRSP or TFSA. Or maybe this windfall is an opportunity to expand your lifestyle goals for retirement. Talking to a planner/advisor about how to maximize this endowment is key.

4. Consider Your Own Legacy

If you have inherited a significant amount of money, it is wise to update your own estate plan to take it into account. Perhaps, instead of it becoming part of your general assets you would like to earmark it in a special way. You could set up a trust for your children, or bequeath the funds in a manner that honours your benefactor, such as a donation to a cause that was important to them.

5. Help Your Own Kids Out

If your own needs are adequately taken care of, perhaps you want to use your inheritance to help your own children now. If you have young or teenaged children, you may want to add money to their RESP accounts to ensure they have the education money they will need in a few years.

The added bonus is that the Canada Education Savings Grant will match at least 20% of your contributions (up to $500) on an annual basis to a maximum lifetime grant of $7,200 per child.

5. Treat Yourself and Honour Your Benefactor

Impulsively spending an inheritance under the guise of “found money” may sound fun, but if you miss the opportunity to improve your financial well-being, you will probably have regrets. That said, using some of the money for a special purchase or experience has merit.

For example, if the money is from a parent, perhaps mom or dad would have been happy for you and your children to visit the country of your parent’s birth.

6. Make the Most of This Opportunity

You have been given an incredible opportunity to improve your financial well-being. Make the most of it by considering all your options. But don’t make decisions while you are grieving.

You need a plan. Consider working with a fee-for-service financial planner/advisor who doesn’t sell investments and specializes in advice that is free from any conflict of interest—an advisor that sells investments is likely to suggest investing your new wealth. A fee-for-service planner/advisor will help you consider a broad range of options that support your personal goals.

Ultimately, the decisions you make can change your financial future and perhaps even the financial future of your children. An inheritance is a loving gift that needs to be handled with care.

How Does IRS Find Out About Inheritance?

Money or property received from an inheritance is typically not reported to the Internal Revenue Service, but a large inheritance might raise a red flag in some cases. When the IRS suspects that your financial documents do not match the claims made on your taxes, it might impose an audit.

When you are being audited, you should receive a letter, or correspondence audit, and an Information Document Request from the IRS requesting additional information. If you received an inheritance during the tax year in question, the IRS might require you to prove the origin of the funds.

Gather any documents that prove the benefactor passed and left you the inheritance. These documents can include the will, death certificate, transfer of ownership forms and letters from the estate executor or probate court.

Contact your bank or financial institution and request copies of deposited inheritance check or authorization of the direct deposit. If you received the inheritance in the form of cash, request a copy of the bank statement that reflects the deposit.

Make copies of each document and verify that the value of each transaction matches the total inherited amount.

Submit the documents to the IRS in the manner requested in the correspondence audit. If you are required to mail the proof, send the documents certified mail.

Do I Have to Declare Inheritance Money?

Inheritances are not considered income for federal tax purposes, whether you inherit cash, investments or property. However, any subsequent earnings on the inherited assets are taxable, unless it comes from a tax-free source.

You will have to include the interest income from inherited cash and dividends on inherited stocks or mutual funds in your reported income, for example.

Any gains when you sell inherited investments or property are generally taxable, but you can usually also claim losses on these sales.
State taxes on inheritances vary; check your state’s department of revenue, treasury or taxation for details, or contact a tax professional.

Consider the alternate valuation date

Typically the basis of property in a decedent’s estate is the fair market value of the property on the date of death. In some cases, however, the executor might choose the alternate valuation date, which is six months after the date of death.

The alternate valuation is only available if it will decrease both the gross amount of the estate and the estate tax liability; this will often result in a larger inheritance to the beneficiaries.
Any property disposed of or sold within that six-month period is valued on the date of the sale.
If the estate is not subject to estate tax, then the valuation date is the date of death.

Put everything into a trust

If you are expecting an inheritance from parents or other family members, suggest they set up a trust to deal with their assets. A trust allows you to pass assets to beneficiaries after your death without having to go through probate. Trusts are similar to wills, but trusts generally avoid state probate requirements and the associated expenses.

With a revocable trust, the grantor can take the assets out if necessary.
An irrevocable trust usually ties up the assets until the grantor dies.

It may be tempting for parents to put their assets into joint names with a child, but this can actually increase the taxes the child pays.

When an account holder dies, the joint holder inherits not only the assets, but also the basis, which is used to figure the asset’s taxable gain in value over the years.
For long-held assets, this can mean a significant tax hit when the child sells the asset.

Minimize retirement account distributions

Inherited retirement assets are not taxable until they’re distributed. Certain rules may apply to when the distributions must occur, however, if the beneficiary is not a spouse.

If one spouse dies, the surviving spouse usually can take over the IRA as their own. Required minimum distributions would begin at age 72, just as they would for the surviving spouse’s own IRA.
If you inherit a retirement account from someone other than your spouse, you can transfer the funds to an inherited IRA in your name. You must begin taking minimum distributions the year of or the year after the inheritance, even if you’re not 72 yet.
If you are younger than the decedent, consider electing the “single life” method of calculating the required distribution amount, based on your age. Your minimum distributions will be smaller, which means you’ll pay less tax on them and the money can grow, tax deferred, for a longer period of time.

Give away some of the money

It may seem counter-intuitive, but sometimes it makes sense to give a portion of your inheritance to others. In addition to helping those in need, you could potentially offset the taxable gains on your inheritance with the tax deduction you receive for donating to a charitable organization.

If you’re expecting to leave money to people when you die, consider giving annual gifts to your beneficiaries while you’re still living.
You can give a certain amount to each person—$15,000 for 2020—without being subject to gift taxes.

Gifting not only provides an immediate benefit to your loved ones, it also reduces the size of your estate, which can be important if you’re close to the taxable amount. Talk with an estate planning professional to ensure you’re staying current with the frequent changes to estate tax laws.

Is it Better to Inherit Stock or Cash?

The right answer is largely influenced by the amount of appreciation or depreciation in the stock.

Gifting Stock

When you make a non-cash gift such as a stock, house, or even a business, the person receiving the gift assumes your cost basis in the assets. They do not receive a “step-up” in basis at the time the gift is made. Here is an example, I buy XYZ Corp stock in 1995 for $10,000. In 2017, those shares of XYZ are now worth $100,000.

If I gift them to my kids, no one owes tax on the gift at the time that the gift is made but my kids carry over my cost basis in the stock. If my kids hold the stock for 10 more years and sell it for $150,000, their basis in the stock is $10,000, and they owe capital gains tax on the $140,000 gain. Thus, creating an adverse tax consequence for my kids.

Inheriting Stock

Instead, let’s say I continue to hold XYZ stock and when I pass away my kids inherited the stock. If I pass away in 10 years and the stock is worth $150,000 then my kids receive a “step-up” in basis which means that their cost basis in the stock is the value of the stock as of the date of my death. They inherit the stock at $150,000 value, sell it the next day, and they owe $0 in taxes due to the step-up in basis upon my death.

In general, if you have assets that have low cost basis it is usually better for your heirs to inherit the assets as opposed to gifting it to them.

The concept is often times reversed for assets that have depreciated in value…..with an important twist. If I purchase XYZ Corp stock in 1995 for $10,000 but in 2017 it’s only worth $5,000, if I sold the stock myself I would capture the realized investment loss and could use it to offset investment gains or reduce my income by $3,000 for the IRS realized loss allowance.

Here is a very important rule

In most cases, do not gift a depreciated asset to someone else. Why? When you gift an asset that has depreciated in value the carry over basis rules change. For an asset that has depreciated in value, the carry over basis for the person receiving the gift is the higher of the fair market value of the asset or the cost basis of the person making the gift.

In other words, the loss evaporates when I gift the asset to someone else and no one gets the tax advantage of using the realized loss for tax purposes. It would be better if I sold the stock, captured the investment loss, and then gifted the cash.

If they inherit the stock that has lost value there is no value to the step-up in basis because the stock has not appreciated in value.

What is The Average Inheritance?

Different studies suggest different levels of average inheritance.

According to a 2015 HSBC survey, American retirees expect to leave an average inheritance of almost $177,000 to their heirs.
The Survey of Consumer Finances (SCF), reported that median inheritance was $69,000 (the average was $707,291). For trust funds, that median wealth transfer was way, way higher — $285,000 (and the average was $4,062,918).
In a new study by United Income, CEO Matt Fellowes looked at how retirees feel and how their spending levels change during retirement and found that:
- The average retired adult who dies in their 60s leaves behind $296K in net wealth
- $313K in their 70s
- $315K in their 80s
- $283K in their 90s
In the NewRetirement retirement planner, you can set a goal for leaving behind an inheritance. For users who have opted to set a goal above $0 in this detailed tool, the range is wide. The average estate goal is $942,000. The median goal is $500,000. However, many people have just $5,000 as their goal for a financial legacy.

NOTE: It is important to note that while the NewRetirement retirement planner is designed to be easy to use by all types of people, users of the tool tend to be wealthier than average – skewing the average inheritance numbers high.

How Much Can You Inherit Without Paying Taxes?

While federal estate taxes and state-level estate or inheritance taxes may apply to estates that exceed the applicable thresholds (for example, in 2021 the federal estate tax exemption amount is $11.7 million for an individual), receipt of an inheritance does not result in taxable income for federal or state income tax purposes.

Nevertheless, all assets you inherit carry with them eventual, and sometimes very immediate, income tax concerns. To make well-informed decisions and handle an inheritance prudently, it is important to understand the type of assets you’re receiving, and the income tax concerns for each.

What Happens When You Inherit Money?

Inheritance tax is often discussed in relation to estate tax. These are two distinct taxes. The beneficiary pays inheritance tax, while estate tax is collected from the deceased’s estate. Assets may be subject to both estate and inheritance taxes, neither of the taxes or just one of them.

Maryland and New Jersey are the only states that collect both estate and inheritance tax. In those states, inheritance can be taxed both before and after it’s distributed. Of course, state laws change regularly. It’s always important to double check with your state tax agency and maybe even an estate lawyer.

The amount you’ll pay in capital gains tax is based largely on the amount of profit you make, using the value at the time of inheritance as your cost basis. If you inherit a retirement account, you’ll have to pay income taxes on distributions. Inherited Roth IRAs, however, are tax free, as are life insurance proceeds.

Can You Still Claim Benefits if You Inherit Money?

Depending on what type of financial assistance you currently receive, you may be required to notify Work and Income about any change in your assets or income and it might affect the amount of benefit you receive.

If your inheritance is in the form of an annuity (an annual fixed sum payment) then this is treated as income and can affect the amount of your main benefit payment or your eligibility for the benefit.

If you have inherited property, or money which is paid to you as a one-off payment, then these are regarded as assets. However, any income generated from those assets (eg, rent from a house or interest earned from money in the bank) is considered income.

It is worth noting that if you have gifted assets into a trust, then any income you receive from the trust can be included in the income test.

How is Inherited Property Taxed When Sold?

If you inherit a home do you qualify for the $250,000/$500,000 home sale tax exclusion? The answer is no. However, you benefit from the stepped-up basis rules for inherited property. As a result, you might not need the exclusion when you sell the home.

First a little background. The tax law provides homeowners with a generous tax exclusion when they sell their property. Up to $250,000 of any gain from such a sale received by a single homeowner is tax free. For married homeowners filing jointly, up to $500,000 of gain is excluded from income.

To qualify for the exclusion, the home must have been used as a main home for two years out of the prior five years before the sale.

At the time you inherit a home, you won’t qualify for this exclusion. You’d have to move into the home and live there for at least two years to qualify. However, you might not really need the exclusion because of the stepped-up basis rules.

“Basis” means an asset’s cost for tax purposes. To determine whether you have a profit or less when you sell an asset, you subtract its basis from the sale price. If you have a positive number, you have a gain. If you have a negative number, you have a loss.

The basis of a home you buy or build is its cost, plus any improvements you make while you own it.

However, a home’s tax basis is determined in a different way when someone inherits a home after the owner dies. When you inherit property after the owner dies you automatically receive a “stepped-up basis.”

This means that the home’s cost for tax purposes is not what the now-deceased prior owner paid for it. Instead, its basis is its fair market value at the date of the prior owner’s death. This will usually be more than the prior owner’s basis.

The bottom line is that if you inherit property and later sell it, you pay capital gains tax based only on the value of the property as of the date of death.

Example: Jean inherits a house from her father George. He paid $100,000 for it over 20 years ago. George made $20,000 in improvements over the years, so his tax basis in his home just before George died was $120,000. However, when Jean inherits the home its basis is stepped-up to its fair market value on the date of George’s death. Jean has the home appraised and this value is set at $500,000. Jeans sells the house for $505,000 a few months after she inherits it. Her tax basis in the house is $500,000. She subtracts this amount from the sales price to determine her taxable gain: $505,000 sales price – $500,000 basis = $5,000 gain.

If you sell an inherited home for less than its stepped-up basis, you have a capital loss that can be deducted (assuming you don’t use the home as your personal residence). However, only $3,000 of such losses can be deducted against your ordinary income per year. Any excess must be carried over to future years to be deducted.

Do You Have to Pay Taxes on Stocks You Inherit?

You are not liable for taxes on the inherited value of stocks you receive from someone who died. The estate of the deceased person takes care of any tax issues, and once you have received stock as part of an inheritance, the stock is yours without any taxes due. However, you can become liable for taxes if you sell your inherited shares.

If the decedent’s estate executor filed an estate tax return, use the value of shares reported on the tax return as your cost basis for the inherited stock. If no estate tax return was filed, you can find the stock’s closing price on the date of death through historical share price information on Yahoo Finance and Google Finance.

Gains from the sale of inherited stock are classified as long-term capital gains, even if you sell the shares shortly after obtaining them. The tax rate for long-term gains is lower than the rate on short-term gains or your regular income tax rate.

What is The Holding Period For Inherited Property?

The holding period is the length of time you own property before you sell it. If you hold property for a year or less, short-term capital gain or loss rules apply. If you hold property for more than a year, long-term capital gain or loss rules apply

For stock, the holding period:

Begins the day after you buy the shares, or the day after the trade date
Ends the day you sell the shares, or the trade date

Special rules apply if the shares you’re selling were a gift or an inheritance:

Gifts — Your holding period includes the time the person who gave you the shares held them. However, your basis might be the fair market value at the date of the gift. If so, your holding period of the gifted stock will begin the day after you received the gift.
Inheritances — Your holding period is automatically considered to be more than one year. So, when you sell the inherited stock, it’s subject to long-term capital treatment. This applies regardless of the actual holding period.

Bottom Line

Some of the richest families in the world have had their vast fortunes squandered by future generations. Benefactors and heirs of lesser fortunes would do well to learn from their mistakes and those of other families with similar stories.

A little planning, care and common sense can go a long way toward taking care of not only the second generation but perhaps the third, fourth and fifth generations as well.