6 Tips for Maximizing an Inheritance

Tips for Maximizing an Inheritance
Marla Brill

By Marla Brill | Jun 11th, 2018

Over the next several decades Americans can expect to receive over $30 trillion from inheritances. Whether the size of an estate is $100,000 or $20 million, unanticipated wealth often leaves heirs with immediate responsibilities such as organizing paperwork or paying bills, as well as longer-term investment decisions. If you’ve recently come into an inheritance, these six tips can help you maximize an unexpected windfall and avoid making common mistakes.

1. Tally up assets and debts

Getting a handle on what’s owned, and what’s owed, is a good first step. Hopefully, there is a well-organized and easily accessible list on hand that includes assets such as bank, brokerage, retirement accounts, as well as any outstanding debts. Some assets, such as brokerage accounts, will be relatively easy to value. Others, such as real estate or jewelry, may require an appraisal. If there’s a life insurance policy, you’ll need to file a claim.

2. Avoid tapping your personal accounts to pay death expenses

If you don’t have the money or desire to pay out of pocket, determine if you can use the deceased’s accounts to pay immediate expenses such as burial or cremation costs, mortgage-related expenses, or ongoing bills. These would include “payable on death” (POD) or “transfer on death” (TOD) accounts, where the proceeds become available to a specified person when the account owner dies, or a joint account with your name. You will need a death certificate to access each of these accounts, so be sure to ask the mortuary or cremation facility for at least ten copies.

3. Don’t forget about taxes

The Tax Cuts and Jobs Act passed last year doubled the Federal estate tax exemption from $5.49 million to $11.18 million per person for 2018. This means an individual can leave up $11.18 million and heirs pay no estate tax. However, the law is scheduled to “sunset” in 2025. Unless action is taken to make it permanent, the estate tax exemption could go back to about where it was in 2017.

Even at the lower exemption amount federal estate taxes apply only to a small percentage of estates in the U.S. However, many heirs are surprised to learn about state inheritance or estate taxes that often apply even to relatively modest estates. Twelve states and the District of Columbia impose an estate tax while six states have an inheritance tax, according to the Tax Foundation. Maryland is the only state that imposes both. Whether or not inheritance taxes apply often depends on the survivor’s relationship to the decedent. In New Jersey, for example, an estate left to a child is not subject to inheritance tax, while the tax for a sibling or aunt could be as high as 16 percent.

4. Choosing saving over spending

In many cases people who receive an inheritance spend all, or at least half
of it
. Like lottery winners, many people who receive an inheritance think of it as “found” money rather than a stepping-stone toward savings goals, such as funding retirement or establishing a college account for a grandchild. Many find that after splurging on vacations, cars, and luxury items the money is gone within five years.

That’s unfortunate, and here’s why. Let’s assume two different 65-year-old women we’ll call Kathy and Michelle receive a $100,000 inheritance from their mothers. Kathy spends the money on vacations and a new luxury car, and it’s gone within three years. Michelle invests $50,000 in each of two 529 college savings plans she establishes for her grandchildren, ages 5 and 3. By the time they’re ready for college, the plans would have grown to $136,000 and $158,000, assuming an 8 percent average annual rate of return. Meanwhile, Kathy has nothing to offer her grandchildren beyond a fond farewell as they leave for college.

5. Pay down debt

Paying down debt, especially high-interest credit cards, is another good use of inheritance money. So is paying down a mortgage, particularly if you’re at or near retirement age and would like to be free of that big debt shackle before you leave behind the security of a regular paycheck.

6. Get for professional help, if necessary

If the legal firm that devised the estate plan is still around you may want to use one of their attorneys to help you with any responsibilities you may have administering the estate. Otherwise, friends and family members are often a good source of estate attorney referrals, as are other professionals you may use, including accountants or financial advisors.

A few resources can help you find an attorney and check out credentials. Lawyers.com has biographies, reviews, and other background information on over 400,000 attorneys in its database. The National Association of Elder Law Attorneys also provides referrals to attorneys with experience in estate administration. When interviewing candidates, be sure to ask if they specialize in estate planning and how long they’ve been in practice. If possible, get a written fee agreement that states the hourly rate, an estimate of the number of hours that will be needed to complete the work, and billing dates.

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Marla Brill

Marla Brill

Marla Brill has been a personal finance journalist for over 30 years,  writing about money topics for Reuters, The Boston Globe, Financial Advisor Magazine, MarketWatch, PBS’s NextAvenue, and other publications.


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