Financial Planning Advice for Managing an Inheritance Brought on By the Pandemic

The ongoing COVID-19 pandemic has impacted almost everyone to some degree. For some individuals, the loss of loved ones may have resulted in an inheritance. Most people who receive a smaller inheritance use it to go on a trip, pay off debt, or purchase something they’ve needed. However, those who receive a larger inheritance may be easily overwhelmed with their options. In these uncertain times, it’s easy to worry about making the wrong move, especially with newfound wealth.

The truth is that over the next 25 years or so, over $68 trillion in assets will pass down from baby boomers to younger generations. That’s a lot of money. If you don’t know how to properly manage a large inheritance, then much of that money could go to waste.

“Many people view an inheritance as a much-needed windfall, but the truth is that without the understanding of what to do, a sizable portion of inheritors see either no change in their overall financial situation or experience a decline in wealth. They actually end up worse off than they were before they received the inheritance. That’s why it’s so important that people understand their options and the logic behind wealth management. An inheritance has the potential to change lives and it’s important that people don’t let it go to waste.” Chuck Elhoff Wealth Manager Virtus Wealth Management

Receiving an Inheritance

More people than ever are understanding the importance of estate planning. It’s no surprise considering the number of losses sustained due to the severe COVID-19 impact. Having an estate plan allows them to determine how their assets will be managed, preserved, and distributed after their death. Not only does this allow them to carry out their wishes after they’re gone, but it makes things easier on the family by reducing arguments about who gets what because there’s already a plan in place for who gets specific inherited assets and how they’re divided.

Receiving an inheritance should be a blessing. However, some people view it as a curse because of the complexities. Here are some tips on how you can make the most of your pandemic inheritance.

Honor Their Legacy

While you contemplate what to do with the inheritance, take the time to remember who left it to you. Consider all the work and sacrifice that went into making such a gift possible. How will your decisions honor your loved one’s memory? Keeping this thought in mind often helps people make better financial decisions. That’s not to say you should go out and donate the full inheritance. After all, they wanted you to have it. This concept speaks more to not spending the money frivolously without regard for the future.

Take Your Time

Often when we lose a loved one our judgment can be clouded. This is not the time to make major financial decisions. And, in most cases, there isn’t an urgent need to make any major changes or decisions right away. It’s perfectly acceptable to let the inheritance sit while you grieve. Consider parking the funds in a money market account for a few months while you mourn. When you feel like you’re ready to start managing an inheritance, it will be there waiting for you.

If you’re married, then you should take the time to decide if you want to park the money in an account only in your name or in your name and your spouse’s name. Inheritances are generally considered separate property in marital legal terms, however, if you commingle the funds then that division ends.

Create a Team

Managing inheritance money can be overwhelming, especially since it’s not uncommon for everyone to have an opinion about what you should do with the money. It’s a good idea to build a team of trustworthy professionals to help guide you through your options.

“Don’t let friends, family, or even financial professionals bully you into doing something that doesn’t make sense for your family. We recommend creating a team to help you understand all of your options so you can make the best choice for you and your family. This team should consist of people such as a financial advisor, an insurance agent, an estate planning attorney, a tax attorney, a CPA, and perhaps a real estate agent. You don’t need people to tell you what to do. You need people to educate you on your options and their lasting impact.” Brian Tillotson Wealth Manager Virtus Wealth Management

Inheritance Planning

Before you take any action, it’s a good idea to think about what you want to do with the inheritance, especially if it’s a cash inheritance. When it comes down to it, there are three basic options.

1. Give
2. Save
3. Spend

If you don’t come up with a plan to tell your inheritance where to go, then you’ll end up wondering where it went. Some people prefer to give some money away. If you choose to go this route, then make sure you’re not giving away more than you can afford to give away.

It’s also a good idea to pay off your debt, especially high-interest debt. However, before you do this, you’ll want to make a list of all outstanding debt. This allows you to see how much money is going where and what you’ll have left over. If the inheritance doesn’t cover all of the debt, then you’ll want to focus on debt with the highest interest rates first. The most important thing to realize is that once you pay off that debt, you want to do what you can to avoid accumulating more. Some people even choose to pay down their mortgage.

Under the save category of financial planning, there are a few options. One important option is to create an emergency fund. Having this emergency fund allows you some wiggle room should you find yourself faced with a financial emergency. It can help you from falling back into the debt trap as long as you use the money wisely.

In addition to an emergency fund, you may want to set some money aside for your children and their future. This can be done in a college savings or investment account or in some other way. Speak with a financial planner about your options to decide what will work best for your family.

“Everyone’s financial situation is different. What might be right for one family may not be right for yours. Spend the time considering what you want to do with the money before you take action in case you change your mind or learn about an option you hadn’t known about before.”  Brian Tillotson Wealth Manager Virtus Wealth Management

Build your financial plan before you take action and then let it sit for a few days before revisiting it. Run your plan by your financial advisor or financial planner and see what they have to say. You’ll want to think about how much you want to invest as well. Investing is a great way to strengthen the inheritance money and build upon it.

Investing an Inheritance

There are a variety of ways you can invest your inheritance to provide peace of mind in the future. However, with investment comes tax planning. Some investment options are better than others when it comes to taxes. Inheritance tax planning is an important part of receiving such a gift.

You may decide to max out contributions to your current retirement plans. Depending on your financial situation, you may even want to start new retirement accounts, especially if you haven’t already. Along with retirement planning, other investment opportunities include investing in stocks and bonds, residential and commercial real estate. However, depending on the markets these may or may not be good options. Both the stock market and real estate have moments when it’s better to invest and when it’s not. This is another reason why it’s good to have a team of trustworthy professionals to offer financial advice, professional advice, and legal advice.

Frequently Asked Inheritance Questions

Each inheritance is different, and each family’s financial situation and financial goals are unique. The best thing you can do for yourself if you get a substantial inheritance is to speak with professionals about your options. However, there are some common questions people ask as well.

What if I Inherit Real Estate?

If you inherit a home or property, you have three options: Sell, rent, or live. Generally speaking, when someone inherits real estate, it’s usually valued at more than what the original owner paid for it. Each option has different requirements and responsibilities.

If you inherit a home worth $300,000 at the time of the owner’s death and you sell it for that value, then you shouldn’t have to pay any capital gains tax. However, if you sell it for a profit then you’ll be required to pay capital gains tax on that profit.

You can rent out the house, however, it can be complicated to find trustworthy tenants, stay on top of upkeep and maintenance, and cover taxes and insurance. Some people choose to hire a property management company to assist them when it comes to renting out the property, but this too comes at a cost.

The nice thing about living in a house you inherited is that you won’t have a mortgage payment. That’s not to say you won’t have any bills at all, however. You’ll still be responsible for property tax and insurance. In addition, the cost of all maintenance and upkeep falls to you once again as the homeowner. However, if you live in the house for at least two years and then decide to sell it you won’t have to pay any capital gains taxes on the profit. Please note that there are stipulations to this rule and speaking with a financial professional will help you understand these stipulations.

What About Estate Taxes, Inheritance Taxes, and Any Other Taxes?

Taxes surrounding an inheritance can get complicated. There is a federal estate tax, however, it only comes into play on estates worth more than $12.06 million. The good news is that no matter the value of the estate, you’re not the one responsible for estate taxes. Instead, the estate will pay the taxes before the inheritance is passed on to you. So, while estate taxes don’t come out of your pocket, inheritance taxes are a different story.

Inheritance tax is imposed after you receive the inheritance, but only in certain states:

– Iowa
– Kentucky
– Maryland
– Nebraska
– New Jersey
– Pennsylvania

Even if you do happen to live in one of these states, you may be exempt from having to pay inheritance tax. You’ll want to speak to your financial planner or a tax professional to find out more. Understanding your federal and state tax laws may influence your investment management decisions including what investments you decide to make.

What if I Inherit Retirement Accounts?

Inheriting a tax-deferred retirement account such as a traditional individual retirement account IRA then you’ll need to pay taxes on the money. If the IRA belonged to your spouse, then you do have the option of rolling it over into your own IRA and postpone the distributions. However, you won’t receive any of that money until you’re 72 depending on the law at the time. So, depending on your current age, this may or may not be a good idea. If the IRA did not belong to your spouse, then any beneficiaries who want to delay paying taxes on the money have the option of rolling the account into an inherited IRA directly. If you accept a check at any time, then the IRS will treat it as a distribution and tax you for it.

It’s a good idea to discuss the consequences of inheriting various retirement accounts or pensions with financial planners experienced in this type of situation.

“Inheriting a retirement account can be tricky based on several factors. Here at Virtus Wealth Management, we review the inherited account and your current situation to provide you with options that address your needs and financial goals. This could mean waiting to access the money or it could mean finding ways to soften the tax blow. Your best interest is our priority, and we’ll do whatever we can to help you pursue the financial future of your dreams.”  Karen Spence Wealth Manager Virtus Wealth Management

Working with a Financial Advisor

Wealth planning involves a detailed look at all aspects of wealth management. Take the time to consider your personal finance goals and think about your own estate plans for the future. COVID-19 took so much away from so many people, but don’t let that inheritance go to waste. Take your time, think about your family, social responsibility, and don’t forget about all the other factors to consider when managing your inheritance or building your estate plans. Don’t forget about estate and inheritance tax and don’t be afraid to seek out the advice of professionals before making any big decisions.

“We regularly help clients through life’s challenges all while working to build a better future. Our experienced and professional team here at Virtus Wealth Management understands the importance of thorough financial planning. We’re ready to sit down and discuss your financial goals and financial situation to help you see the path to a healthy financial future.”  Karen Spence Wealth Manager Virtus Wealth Management

Contact Us

When you need an experienced financial advisor, the team at Virtus Wealth Management is here to serve you. Our team has years of financial wisdom in many different areas. Our areas of concentration include retirement planning, wealth management, risk management, and more. If you’re wanting to evaluate your plan to save for retirement, get into or change your approach to the stock market, or if you just need overall investment advice, we’re here to answer your questions.

Call us today at 817-717-3812 to learn more about how our services and how we can help you find a great financial advisor.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Good Life Advisors, a registered investment advisor. Good Life Advisors and Virtus Wealth Management are separate entities from LPL Financial.

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.

About the author

Lisa Parziale is an independent author that writes about various topics and owns a marketing company in North Texas. If you would like to contact Lisa, please use the information below.

Portside Marketing, LLC
1011 Surrey Lane, Bldg 200
Flower Mound, Texas 75022
(972) 979-9316

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