The inherited wealth was enough to cover her current annual income many times over. The problem though was the conflicting advice she was receiving from everyone around her about using it.
Protect it, instructed her mother. This wealth was accumulated by your father through years of hard work. So treat it with respect and make sure it is not wasted, advised the mother. While that seemed quite fair, what it would mean, asked the daughter.
The risk profile, preferences, needs and attitudes towards money differ significantly across generations. If the elderly like to keep the capital protected and earn an interest income, even if it is modest, the younger generation that inherits it will have enough time on hand to seek growth out of that money. They may be able to take risks to make it appreciate in value.
5 Important Steps to Maximize an Inheritance
- Spend Some Money on Yourself
- Don’t Forget About Taxes on Your Inheritance
- Don’t Quit Your Day Job Just Yet
- This Is Your Inheritance, Take Care of Yourself
- Consult your Financial Team to Maximize Your Inheritance
How Inheritance Works when there’s a Will?
When someone dies and there is no living spouse, survivors receive the estate through inheritance. This is usually a cash endowment given to children or grandchildren, but an inheritance may also include assets like stocks and real estate. Asset distribution is determined during the estate planning process, when wills are written and heirs or beneficiaries are designated.
The will specifies who will receive what. To distribute everything evenly, one can simply list beneficiaries. If certain items are to be left to certain people, that must be spelled out in the will.
For the inheritance process to begin, a will must be submitted to probate. The probate court reviews the will, authorizes an executor and legally transfers assets to beneficiaries as outlined. Before the transfer, the executor will settle any of the deceased’s remaining debts.
How Inheritance Works when there isn’t a Will?
Inheritance becomes more complicated if the deceased did not outline asset distribution before death. In that case, a probate court must determine the wishes of the deceased as best it can. The probate court will check to see if the deceased named beneficiaries on stocks, bank accounts, brokerage accounts and retirement plans. Real estate, jewelry, heirlooms and other property can be more difficult to allocate.
Once the plan is established, the court will appoint an administrator to act as executor and disseminate the assets. This process can take months or years to settle.
How do you receive Money from a Will?
Let’s continue on with the example from earlier and pretend that your grandmother recently passed away. Your grandmother told you verbally that she named you her beneficiary in her Will. You’re probably wondering what the actual process of receiving money from the Will looks like.
In her Will, your grandmother would have named an Executor. This individual is responsible for making sure that the wishes in your grandmother’s Will are carried out dutifully. Executors are commonly attorneys or trusted family members. There are several steps they must follow before they can give you your inheritance.
Step 1: Asset Inventory
The Executor’s first task is to obtain your grandmother’s estate planning documents, including the Will, along with other important documents. Bank statements, house deeds, car titles, and insurance policies are all examples of documents that must corroborate what was delineated in the Will. Any outstanding bills must also be collected. The Executor may be required to present this information to a probate court, depending on the state.
Step 2: Asset Valuation
Next up, the value of your grandmother’s assets must be calculated. The courts require a listing of all assets in the inheritance, as well as their date-of-death value. If you as the beneficiary decide to sell any of the assets, you’ll be assessed capital gains tax. Although taxes are unavoidable, getting the date-of-death valuation is a good thing. It’s called step-up in basis, meaning that you’re only going to be taxed on the gains you made from the date-of-death value, and not from the prices at the time the assets were originally acquired.
Step 3: Bill Pay
If your grandmother had any outstanding bills, they must be resolved before you can receive your inheritance. Here’s a list of common types of bills that are often outstanding upon a person’s passing:
- Utility bills
- Medical bills
- Credit card payments
- Personal loans
- Mortgages
The Executor is responsible for notifying creditors of the death. Oftentimes, a notice will be placed in a newspaper, along with instructions on how to report a claim within a set time limit. Any disputed claims could go before a judge, which can complicate things and extend the timeline.
Step 4: Taxes & Returns
In the second to final step, the Executor will then file any required federal and state estate taxes, inheritance taxes, and final income taxes on behalf of your grandmother. Any taxes owed must be paid at this time.
Step 5: Distribution
Finally, it’s time for the inheritance to be distributed to the beneficiaries. Distribution of the inheritance is the last step because all bills and taxes must be paid. As the beneficiary, you don’t want to be held liable for any unpaid bills or deal with legal battles.
A large inheritance enables several financial goals that may be otherwise tough to fund. It also modifies how money will be used and allocated. It would be a pity if these privileges are not enjoyed in one’s lifetime. Consider these choices, for example:
First, the wealth might do away with the need to buy insurance and pay a premium on it. Insurance is a protection that is purchased to reinstate the wealth of the family, in case a risky and unexpected event happens that upsets the finances of the household. The computation of the required amount of insurance to buy, will consider the wealth needed to generate an income that can stabilise the household, should there be a loss of income. The presence of a large bequest serves this very purpose without having to incur the cost of the insurance premium.
Second, the saving ratios of the household need not be so strict. The corpus that is needed for many of the life goals such as higher education and retirement might be well funded by the bequest. The household can enjoy its current wealth without the fear about the future goals or about unexpected large expenses. The freedom this provides might be very valuable. So many struggle with the decision about how much to spend and how much to save. The availability of a hoard of wealth makes it easier to spend, and enjoy the current income without sacrificing long term interests.
Third, the building of long term wealth for most households will require setting aside a small amount of money each year, which will eventually grow to a large corpus. This places severe restrictions on withdrawals. When the corpus has to be accessed for any emergency or an important large expense, it is dented by the impact. Building it again to reach the earlier levels remains a challenge using the current income streams alone.
Many find it tough to take a loan against their PF, or liquidate a large investment, even for an important goal such as higher education, due to the goal compromise it entails. Funding higher education for example, tends to harm the retirement corpus, with limited time available to build it back in value.
Fourth, a bequest enables taking a long term view of financial decisions without the worry about tactics and timing. The strategic orientation that helps build wealth over time is easily applied when a large bequest that need not be accessed immediately is available for allocation. The division between growth, income and liquidity is easier and it is possible to view this corpus as different from the routine income that flows into the household.
Fifth, a bequest enables funding of projects that may not otherwise receive funding or attention. For example, if the inheritor nurtures the dream for entrepreneurship, and wants to begin a new business, the bequest is available to fund the initial capital. It is also possible to raise loans using the equity provided by the bequest. The flexibility of funding with own or borrowed capital helps with the structuring and shaping of the new business