Chances are some day you will receive an inheritance. According to the HSBC’s The Future of Retirement series Life After Work? report, the average American inheritance is expected to be approximately $177,000. Americans come in sixth in the world behind Australia at about $500,000, Singapore at $371,000 followed by United Kingdom, France and Taiwan*. Inheritances represent a fork in the road for beneficiaries with the stakes high for making a big mistake.
With an inheritance in hand, arm yourself with the knowledge to ward off mistakes. Below are five tips to keep you on the right track.
1) Set a limit for how much of the money will be used for special expenditures such as buying a new car or paying down debt. A 2012 study by Ohio University revealed that heirs lose, spend or donate 50% of their inheritances. Consider paying down debt before extravagancies.
2) Invest the remaining monies in accordance with your investment strategy. Don’t worry about investing at the wrong time. If you have a good strategy in the long run you will likely be better off.
3) Consolidate your investments and refrain from holding sentimental investments. Real estate owned by multiple beneficiaries can be hard to get unanimous agreement on selling, but even more difficult to manage expenses or usage rights going forward.
4) Make sure you obtain the proper step up in basis. Inherited assets receive a step up in basis and are reflected on the state inheritance tax return in PA. Inquire with the estate executor to obtain this information.
5) Understand the tax implications. Consider stretching out distributions from IRAs and annuities either over your lifetime or for five years. Financial institutions usually will provide you with options. You should seek counsel before pulling the trigger on distributing the money all at one time. This can be a tax nightmare and catapult you into a very high tax bracket.
We think it is wise to seek advice and follow a disciplined strategy. Better yet, have a discussion with your loved ones while they are living in terms of what to do with the inheritance. This can relieve the anxiety of making decisions and give you permission to do the right thing.
* www.hsbc.com/retirement, “The Future of Retirement, Life After Work?” page 26