After receiving an inheritance, you need to determine how to incorporate those assets, whether stocks, bonds, real estate, or some other asset, into your finances. Consider these points during the process:
Determine what you will receive and when. Inheritances typically don’t come in the form of one check. You’re likely to receive pieces of different assets over a period of time. Work with the estate’s executor to determine what assets you’re likely to receive and when you can expect them.
Resist the urge to spend the inheritance. You may be tempted to spend the inheritance on a new car, an extravagant vacation, remodeling your kitchen, or other things you never had the money for. First take a look at how the inheritance would help with longer-term goals, such as funding retirement or your children’s college educations.
Decide how the assets fit in with your current assets. If an inheritance is significant, it may drastically alter your asset allocation. First, you need to decide if your original asset allocation is still appropriate and then determine how to move closer to your targeted allocation.
Understand the tax implications of inherited assets. Any gains from the sale of inherited assets are subject to the long-term capital gains tax rate, regardless of how long you personally owned the asset.
Handle an Inheritance
A law passed back in 2010 reinstated a favorable rule that allows the federal income tax basis of inherited capital-gain assets (such as real estate and stock) to be “stepped up” to reflect the date-of-death fair market value. This rule applies to heirs of decedents who die after 2010 and later years.
Review each inherited asset to determine whether it is appropriate for your financial goals. Consider selling assets that don’t meet your financial goals or that you don’t have the expertise to manage. Don’t keep inherited assets for sentimental reasons. If you decide to sell, keep in mind that you’re not questioning the investment capabilities of the person who gave you the assets.