No matter when it occurs, the loss of a parent is always a tough life passage. The finality of death often ushers in emotions that are both intense and perhaps unexpected. For many, the sense of now being “at the front of the line” can summon both the ache of a parent’s absence and a sobering sense of one’s own mortality. At the same time, there may be practical items to deal with in the short term, such as planning a funeral or memorial service, notifying family, friends, and organizations such as social security and insurance companies, as well as managing property or household services.
In addition to the emotional challenges posed by the passing of one’s parents, there can also be a set of financial decisions and challenges that require careful thought and preparation. In fact, it’s wise to begin giving thought to these matters while one’s parents are still living; decisions made ahead of time are often more sound than those taken while simultaneously dealing with the grief of loss.
As prospective heirs consider the expectation of receiving and positioning inherited assets, for many it may be the first time they’ve ever had to make decisions about large sums of money, and the responsibility can be overwhelming. However, there are a few basic facts and steps that can make everything go more smoothly—and can also save on expenses and taxes incurred on the inherited wealth.
- Get familiar with the documents. This is Estate Planning 101: the will—or, in some cases, the trust documents—govern how the assets will be distributed. When there is no will or other estate planning document in place, things get much more complicated, and the legal costs for settling the estate and making final disposition of the assets rise dramatically. If your parents haven’t already done so, they should obtain the services of an estate planning attorney, especially if the bequest is extensive, but you should also be familiar with the broad outlines of the will. Having this knowledge going in will make everything much easier.
- Know your cost basis. Let’s say that your parent passes away, and their will stipulates that you will receive stock they owned. Let’s also say that they bought the stock years ago, at a price of $20 per share. Today, however, that stock is worth $150 per share. Current estate law provides what is called a “stepped-up basis” for your cost; your ownership is set at the price of the stock when you inherited it: $150 per share. The same would be true of any real estate or other tangible asset that you inherit. This is important, because the assets you inherit may not necessarily be appropriate for you to continue owning, long-term. For example, suppose you have inherited a commercial property that is located in another state. Unless you want to be in the interstate property management business, you may wish to sell the property and reallocate the proceeds into a different type of investment. Because your cost basis upon inheriting the property is set at its value upon the death of the testator (the person who made the will), you could possibly sell the property without incurring much, if any capital gains tax.
- Retirement accounts. A retirement account can be bequeathed by means of naming a beneficiary, much like an insurance policy. If you inherit a retirement account (IRA, 401(k), or 403(b)) from someone other than your spouse, you may wish to roll the assets into an inherited IRA account. After you’ve done that, you will have ten years to take full distribution of the assets, allowing you to spread the tax burden out over that 10 year period. When inheriting a Roth account, even if you’re younger than 59 ½, you won’t be subject to the 10% early withdrawal penalty. If the inherited IRA was from a Roth account established at least five years before the grantor’s death, you also won’t have to pay taxes on the required distributions.
- Special Circumstance. Depending on your parent’s circumstances, there could be other factors to consider, such as inheritance of company stock options, disposition of real property, and handling of business interests. If you are the executor of your parent’s estate, you will have other duties to perform as the will is probated. The guidance of a qualified estate planning attorney or trust officer can be invaluable for helping you negotiate the various requirements and processes.
You should also work closely with a qualified, professional financial planner who is familiar with your financial situation and resources. The planner can advise and guide you on the best ways to handle and possibly reposition your inherited assets to your best advantage.
At JFS Wealth Advisors, we have the knowledge and expertise to provide reliable guidance for all of life’s financial passages, including the death of a parent and the intricacies of the inheritance process. To learn more, visit our website to read our article, “Serving as an Executor: What You Need to Know.”
Disclosure: JFS is not a law firm and does not provide legal services. These materials are for informational purposes only and should not be construed as legal advice. If you require legal advice, please consult with a licensed attorney.
