Receiving an inheritance can be a life-changing event Whether you are expecting an inheritance or it comes as a surprise, knowing what to do when the money arrives can help you make the most of your windfall This guide will walk you through the key steps for receiving inheritance money so you can avoid common mistakes and put the funds to good use.
The Probate Process
Before inheritors receive their share of an estate, the assets must go through probate. This is the court-supervised process for administering a deceased person’s estate according to their will or state law. It involves:
- Validating the will
- Inventorying assets
- Paying debts and taxes
- Distributing remaining assets to heirs
The probate process ensures the deceased person’s wishes are carried out and creditors are paid before inheritors receive their inheritance. It typically takes 6 to 24 months, but can vary considerably depending on the estate’s complexity.
Receiving Your Inheritance
Once probate concludes, the estate representative will distribute inheritances to the beneficiaries. How you receive the assets depends on what you’re inheriting
Cash
Most of the time, cash inheritances are sent to you by check or direct deposit into your bank account. Make sure the estate agent has your most up-to-date phone number and bank information.
Securities
Your name is added to stocks, bonds, and other securities that you inherited. This is taken care of by the real estate agent or brokerage firm that is in charge of the investments.
Real Estate
You’ll receive a new deed registering the property in your name. Record the deed at the county records office to update ownership.
Personal Property
Cars, jewelry, collectibles, and other tangible property are physically delivered to you. Make arrangements with the estate representative for shipment or pickup.
Retirement Accounts
Assets in IRAs, 401(k)s, and other retirement accounts are transferred directly to an inherited IRA in your name. A financial institution handles the transfer.
Claiming Life Insurance Proceeds
If you have a life insurance policy with a named beneficiary, the money from the policy goes straight to you instead of going through probate. Get in touch with them right away with a certified death certificate and claim forms that are filled out.
For policies paid to the estate, you’ll receive your share once probate concludes.
What to Do When You Receive Your Inheritance
When the inheritance arrives, you’ll want to:
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Put money into a safe, FDIC-insured bank account until you decide what to do with it.
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Consult professionals like a financial advisor, accountant, and estate planning attorney for guidance on managing your windfall wisely.
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Evaluate debts and pay off any high-interest credit cards or loans. This provides a guaranteed return equal to the interest rate.
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Set aside funds for an emergency fund with 3-6 months of living expenses if you don’t already have one. This helps avoid future debt.
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Review insurance needs and consider if more life, disability, or long-term care insurance would be prudent given your increased assets.
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Develop a financial plan for funding retirement, education, real estate, and other goals with your new resources. A professional can help with this.
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Explore tax implications with an accountant related to the inheritance value, asset sales, IRA withdrawals, etc.
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Make any major financial decisions slowly after careful analysis. Don’t rush into purchases or investments.
With smart planning, an inheritance can provide long-term financial security. Avoiding common mistakes like overspending requires discipline and guidance from professionals. But the effort pays off through prudent wealth management that honors the legacy of the person who thoughtfully left you their assets.
Frequently Asked Questions
How long does it take to receive inheritance money?
You typically must wait 6-24 months for probate to conclude before receiving your inheritance. The process can drag on longer if the estate is large or complex.
What taxes apply to inheritances?
Inheritances aren’t taxable income for federal tax purposes, but assets above $12.06 million (for 2022) may incur federal estate tax. Some states impose inheritance or estate taxes for smaller amounts.
Can I receive an advance on my inheritance?
Some companies offer inheritance advances, providing heirs cash upfront in exchange for a portion of their future inheritance. This bypasses probate delays but reduces the amount ultimately received.
What happens if someone contests the will?
When the validity of a will is contested, inheritors may need to wait months or years longer until the court challenge is resolved and probate can proceed.
Can an inheritance affect government benefits?
Inheritances typically don’t affect Social Security benefits, but could impact eligibility for means-tested programs like Medicaid, SSI, and SNAP until the assets are spent down.
How should I invest an inheritance?
Your investment strategy should align with your timeline and risk tolerance. A financial advisor can help craft an appropriate asset allocation using stocks, bonds, mutual funds, real estate, etc.
Should I pay off my mortgage with inheritance money?
Whether it makes sense depends on mortgage interest rate, time until payoff, and potential investment returns. Run the numbers, but paying off a mortgage often feels psychologically rewarding.
What’s the best way to gift inheritances to others?
Gifting directly avoids income taxes, but there may be gift tax implications. Trusts, 529 plans, and donor-advised funds offer other tax-savvy gifting strategies.
Can I reject or disclaim an inheritance?
Yes, you can formally disclaim all or part of an inheritance if you don’t want it, allowing it to pass to the next beneficiaries. There are rules and deadlines for valid disclaimers.
With careful planning and professional guidance, an inheritance can help secure your financial future. Avoid rash decisions, educate yourself on the process, and invest wisely to make the most of your windfall.
Other Frequently Asked Questions About Inheritance
If you have more questions about how inheritance works, it’s only natural. No one’s a “pro” at receiving inheritance money, and it is a somewhat complicated process. Here are some answers to common questions.
What is an Inheritance ?
An inheritance is the collection of assets you might receive from a loved one when they pass away. It can include such things as:
- Cash
- investment assets such as stocks or bonds
- Real property, including land and real estate
- items such as jewelry, furniture, collectibles, and family heirlooms
As an example, let’s say that a grandmother passes away and leaves all of her assets to her granddaughter. The granddaughter’s inheritance includes the money saved in her late grandmother’s checking and savings accounts, her house, clothing, jewelry and car.