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Money March 2016

Dollar Sense

What to Do When an Inheritance is Coming Your Way

By Teresa Ambord

Suppose you’re within a few years of retirement when Uncle Buck leaves you a large amount of stocks. You’re grateful, but your asset allocation is now skewed. Don’t rush to sell. You’ll need to sit down with your advisers and rebalance your portfolio, being careful not to trigger a tax bill.

An inheritance can be a wonderful thing, but it won’t be without challenges. Depending on how you handle it, it could be an American dream, or a waking nightmare. Everyone’s heard horror stories of the person who comes into a bundle of money and soon ends up in worse shape than ever, possibly from an impulsive shopping spree, a sure-thing investment gone bad, or an unscrupulous adviser.

Now that it’s your turn… don’t be the next horror story. Whether the inheritance you’re expecting is substantial or modest — there are steps you should take to help you make the most of it. Here’s some guidance.

 

What will you inherit and when?

The estate executor will have this information. Generally an inheritance is not received all at once, but in pieces, so don’t rush to encumber the money by signing a purchase contract.

 

Whose advice will you take?

Assemble a small team of trusted advisers: a financial planner, an estate planner and a tax specialist. Check out their track records independently and then talk over your goals with them before you let them touch your money.

 

How does the inheritance fit with your existing assets?

If you’re nearing retirement, you may already have a well-planned portfolio with an asset allocation appropriate for you. Most experts agree that, as retirement approaches, you should minimize your risk, generally by having the bulk of your money in high-quality bonds, a smaller amount in stocks, and some in cash.

Suppose you’re within a few years of retirement when Uncle Buck leaves you a large amount of stocks. You’re grateful, but your asset allocation is now skewed. Don’t rush to sell. You’ll need to sit down with your advisers and rebalance your portfolio, being careful not to trigger a tax bill.

 

What are the tax implications if you sell inherited property?

Tax law favors those who sell inherited assets soon after receiving them, but check with your tax adviser to make sure you won’t owe capital gains tax on the sale. It’s important to view your current tax situation as a whole, before you make decisions about the disposition of new assets.  If you are already looking at capital gains and losses, you may be able to mitigate the overall tax consequences with careful timing. That’s why planning your moves with your tax specialist is critical.

 

Are you already working to reduce your taxable estate?

If you’ve been systematically reducing your taxable estate — by gifting or transferring assets — you know an inheritance can blow those efforts. You can step up your reduction plan, or you can turn down the inheritance and still keep the assets in the family. Ask your attorney about filing a disclaimer that will allow the inheritance to bypass you and go straight to the next in line, presumably your heir. However, before you do that, make sure the decedent has not named an alternate beneficiary in his/her will.

As you wait for your inheritance, slow down. Plan carefully with the guidance of quality advisers, and you could end up being the smart one… not the next horror story.

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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