Surprise, You Have an Inheritance. Now What?

Joshua Dobi |

Many of us, at some point in our lives, will have an inheritance bestowed upon us. You may inherit money from parents, a relative or friend and it can come in the way of cash, investment accounts, property, possessions, the list goes on. But what does this mean from a financial planning standpoint? Sometimes there is very little planning involved because there is no expectation of what the inheritance is. If you do find yourself in this situation, reach out to your tax advisor and/or financial planner to help guide you through the process as there are many details that need to be taken into consideration.


Here at North Main Financial we help our clients with inheritance planning with some frequency. In fact, we had a client that unexpectedly became the recipient of an inheritance from the estate of a parent who had passed away. Needless to say, there was some amount of complexity to this particular situation, but we approached it like we do with all our clients. We first looked through all the paperwork to understand the details. We then evaluated a variety of different factors including the client’s current financial space (did they need money now or could they wait), the tax implications, future financial planning, etc.


In the case of this client, there was a trust with some sub trusts associated with it. Some were intended to be specific for grandchildren for their educational needs. Some were intended to be set aside for a special needs member of the family to allow for an endowed kind of financial experience. Finally, there was to be what we would sometimes call a more standard level of inheritances with regards to inheriting retirement accounts and trust accounts. So, we began the process with a very wide funnel and had to get our arms around what it all meant. Additionally, we had to consider an executor who is not a family member, and an attorney trustee who was not a member of the family, who we had to include in the process.


Now, given the scenario above, how do we begin? With many inheritances they are fairly simple. There may be a form or two to sign, an explanation of tax ramifications for the things you might do, and then it moves forward quickly. Or it could be that there are a lot of moving parts and it’s going to take time to move through all of it. Therefore, consulting with a tax advisor or financial planner is a good idea.


Reflecting on our example above, and knowing this scenario is unique to this client, we wanted to outline three points as food for thought when it comes to an inheritance.


Understand Tax Ramifications

Understand the tax ramifications for the different choices that you could make in an inheritance kind of scenario which involves a retirement account. They could be broad, they could be significant, especially if you are at a place where you don’t need those funds right away. Are there ways in which those funds could be tax deferred going forward? There are several different pathways you can go but one direction is to look at a stretch IRA, an opportunity as a beneficiary to take withdraws from a beneficiary IRA but only with what are Required Minimum Distributions or RMDs.


For our client a substantial portion of what they are going to receive is from an IRA. They didn’t want to incur significant tax liability and didn’t need the funds that were to be inherited from that account. That said, IRAs can take on many flavors so it’s important to understand the kind of IRA you are dealing with. What do you need to consider with inheriting an IRA?


When you are the beneficiary on an IRA, 401K, 403B or other ERISA level plan, you have the opportunity to make your inheritance into a beneficiary IRA first. It moves out of the original account into a beneficiary account, with this you must be listed as a beneficiary on the original account. If you are a child of the original account owner, a distant relative or a non-relative, you have non-spousal beneficiary designations. From here you start to look at distributions and what type of tax ramifications that would have on your individual situation.


How Your Inheritance Affects Your Financial Plan

Upon receiving an inheritance, look at your current financial space and understand what, if any impact the inheritance has on your financial plan going forward. If you are inheriting a small amount and it’s something that won’t impact your tax situation very much, or change your lifestyle and/or overall portfolio, something like a beneficiary IRA may not make sense.


If the inheritance is going to impact what your overall picture looks like it’s important to quantify what that means for you. In the case of our client above, the inheritance will allow the husband and wife to retire from their professional spaces sooner. Originally, they had anticipated retiring at 62 and now it looks like they will be able to retire at 52. While the thought of retiring early is exciting, there are a lot of considerations to think about. In the case of this client, 52 is very young so how does that look? From a work standpoint, from an insurance standpoint, there are many things to think about here.


Make Sure to Implement

In many cases, when it comes to inheritance, there is some level of planning but then no execution. It’s important to take the next steps after planning. If you have planned to set up different investments, trusts or other investment vehicles so your beneficiaries are set up correctly, make sure to follow through.


Going back to our example above, we worked with our client to set up some trusts so their children would be set up correctly. This client is philanthropic so we are also looking at some trust structures and charitable strategies that will take a portion of their inheritance and put it to work so they can maximize their impact on their philanthropic desires.


When you plan and implement, structure things so that not only will you be set up for today, but your beneficiaries will be set up moving forward.


In Summary

If you come into an inheritance situation first, look at the tax ramifications, especially if it’s a retirement account. Undertsand what your options are and how you can withdraw funds whether it be a lump sum or a distribution over a period of time.


Second, how does the inheritance affect your financial plan. Can you retire earlier? Will your lifestyle change?


Finally, what choices do you need to make for yourself and your beneficiaries and beneficiaries to follow. This is the kind of thing that will change so you’ll want to review your financial plan as you move forward.


As you can see, being the beneficiary of an inheritance can get complicated fast and there are a lot of things to think about. Again, consulting with a tax accountant or financial planner is always a good idea as they understand the laws and can provide you the appropriate options to help guide you through your situation.


Interested in hearing more about this topic? You can listen to the full episode of the North Main Financial radio show on WSIC by clicking here: Inheritance Planning (3/9/19)


If you have questions about your financial goals, or would like to talk with us further about our services, give us a call at (704) 987-1425 or visit us at If you wish to schedule an introductory meeting, we would be happy to meet with you at no cost or obligation to you.


These Blogs are provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of SagePoint Financial.