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Understanding Inheritance Issues


Whether a recent death has brought you money, property, or retirement account proceeds - or all three - you may find yourself suddenly facing unanticipated legal and financial decisions.

Understanding basic terms and information

If you are inheriting upon someone's death, there is some basic information of which you should be familiar:

  • Inheritors, heirs, and beneficiaries. These terms apply to those who inherit according to a will or to the law, such as a spouse or child.
  • Debts. In almost all cases, you are not legally responsible for any debts that a parent or other relative owes at the time of death. The chief exception to this rule is for certain (but not all) debts of a deceased spouse. When a person dies, only his or her estate, and not any inheritor or relative, is responsible for paying any remaining debt.
  • Estate. This term applies to the assets left behind upon a person's death.
  • Executor. The executor, who is named in the will or appointed by the court, gathers, secures, and manages the estate's assets, such as real estate, bank accounts, stocks, shares in a business, and cash. The executor first pays the estate's debts and taxes using the assets and then distributes what's left, either according to the will or to state law.
  • Probate. Probate is the legal process in which a court oversees the distribution of property upon the owner's death. Most states have informal probate or small estate procedures for estates under a certain dollar amount, such as $50,000.
  • Taxes on the estate and on your inheritance. Both federal and state taxes may be due after a death. The federal estate tax can be large, depending on the size of the estate, but it only applies to estates with a net worth of $5 million or more. Every state has some kind of estate or inheritance tax - either an estate tax that is payable out of the estate's assets, or an inheritance tax that inheritors need to pay.
  • When there is no will. Every state has laws called "intestacy laws" that provide a formula for determining who inherits, and how much he or she inherits, when there is no will. The spouse and children typically get certain portions of the estate. If there is no spouse or surviving children, the law includes provisions for other relatives.
  • Joint ownership, named beneficiaries, and trusts. Sometimes a deceased person's belongings pass to someone other than by a will. This happens often when two people are named jointly with right of survivorship on a bank account, real estate title, or car registration. Upon the death of one of the co-owners, the surviving owner becomes the sole owner of the asset. Life insurance policies and retirement accounts usually have named beneficiaries to whom money will go upon the death of the owner. Finally, assets might be held in a trust, which distributes the assets to the trust beneficiaries according to the terms of the trust.

Taking an asset inventory

Soon after a person dies, his or her belongings must be inventoried and a value placed on each item. This is typically the job of the executor, who must gather all of the deceased person's personal belongings, accounts, investments, real estate, and debts and list them on a balance sheet. It's important not to remove any belongings from the deceased person's residence until this inventory has been completed.

The inventory is essential for estate tax purposes, and it will probably be required by the probate court as well. As an inheritor, you will need to know and document the value of any large assets you inherit because you may one day decide to sell something that you inherited. If there is a capital gain from that sale, then your capital gains tax will be computed based on the property's market value at the date of death of the person from whom you inherited it.

Making decisions about your inheritance

Inheritances can involve complex financial and emotional issues. It's best to proceed wisely and slowly and to be as informed as possible.

  • Take it slow. Don't make hasty decisions or impulsive purchases. An inheritance may represent the largest sum of money you'll ever receive at one time.
  • Put cash in a safe place. While you're considering your options, put inherited cash into a low-risk money-market fund or CD, so it's safe.
  • Get expert advice. Consult a probate lawyer within two weeks of the death. A lawyer can give you a good idea of the timetable and any issues you might face. This needn't be expensive; sometimes one hour can lead to a plan of action that saves you time and money. Other experts you should talk to are an accountant and a financial adviser.
  • Incorporate your inheritance into your own estate planning. If you already have a will, look at it again in light of your new assets.
  • Decide what to keep and what to sell. Decide how to allocate inherited cash among your existing investments and savings, what you will do with any inherited property, and what to do with inherited stocks.

Keeping careful records

Keep the following documents in a secure place:

  • A copy of the will.
  • A copy of the trust document, if your inheritance includes an account that was put in trust for you.
  • Records of the purchase price of each asset, if these are available.
  • Purchase documentation, including warranties and service records, if inheriting a car or other items subject to warranty.
  • Valuations of assets as of the time you inherit them.
  • Multiple copies of the death certificate. Request these from the funeral home. The executor will likely notify most of the necessary agencies, such as the Social Security Administration and the IRS, but if you are a beneficiary of a retirement account, you will need to send a death certificate to the custodian of that account.

Special considerations

  • Retirement fund assets. This is the one case where you don't have a lot of time to make decisions and take action. Tax law provides several choices regarding how to handle an inherited retirement account, with varying tax consequences, complicated rules and deadlines, and possible tax penalties. It's important to meet with a tax advisor or financial planner who is familiar with retirement funds.
  • The family home. It's tempting to hold on to the family homestead, but you'll need to be realistic in considering whether to keep it or sell it. A parent may have left it to all the children to share. Discuss what to do with the property and bear in mind that some inheritors may feel more strongly than others. One option, when inheritors don't agree, is for one person to sell his or her portion of the home to another inheritor.
  • An inheritance that's been put into trust for you. If money or assets were put into trust for you, you have little control over that trust account. A trustee will be responsible for following the instructions in the trust. Get a copy of the trust document, and pay special attention to what it says about the trustee's discretion in disbursing assets. You do have a right to know what the trust is doing. Make sure that the trustee arranges for you to get monthly or quarterly statements of the account, so you can monitor performance.

Disagreements with other inheritors

Sadly, a death can sometimes cause rifts in families. In some cases, a will leaves unanswered questions about who gets what and why. Lack of a will can leave relatives squabbling over personal items. Experts caution against contesting a will or getting into lawsuits over inheritances whenever possible.

It's best to try to negotiate with your fellow inheritors. For objects with sentimental value, one common solution is to get together and take turns choosing items. If the intent is to make sure that everyone receives objects of equal monetary value, then after all items have been appraised, allot each person a certain amount to "spend" in the same type of taking-turns process.


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