Whether you’re left a lot of money from an inheritance or a smaller amount, receiving cash unexpectedly can leave people dizzy with possibilities. Can you finally take that European vacation you’ve always dreamed of? Buy a hot convertible? Quit your job?
Experts are clear that you should do none of those things—at least not for about a year after you’ve received this money.
As a probate attorney in South Florida, I have many clients who are fortunate to have been left an inheritance from the estate of their parents, other relatives, or good friends. I understand the temptation to do something fun and exciting with money you didn’t have to work for (at least not in the traditional sense; if you took care of your elderly parents that was plenty of work).
But experts agree that treating an inheritance like Monopoly money is a mistake.
According to the Federal Reserve, about 30 percent of all inheritances range from $50,000 to $250,000, with about 15 percent being even more than that. But even if you receive less, it can still have an impact on your life.
The New York Times recently ran an article showcasing various beneficiaries and how they dealt with their newfound gains. For example, the article shares the story of two sisters who each received several hundred thousand dollars when their father passed away. One invested the money wisely, helping to insure for a better future than her pension as a retired teacher was providing. The other bought a new car and condo—and subsequently struggled to meet the monthly payments of her new home.
Similarly, I once had a client who couldn’t believe the amount of money his seemingly-poor father had accumulated in his bank accounts when he died. The man promptly booked a cruise-around-the world and took several other extravagant vacations. When he came back from the last one, he was as broke as when he started. (And obviously broker than his father had been.)
The Time article quotes a money manager as recommending the creation of a “decision-free zone” for up to a year, an idea I especially love, having seen some clients, including that man and others, immediately go the route of the profligate sister.
During this cooling-off time, you place the money in a federally insured bank account (or more than one, if it’s over the insured limit of $250,000). You then meet with a financial advisor, accountant, a tax lawyer, and other professionals before doing anything else with the money.
You may be wondering why an accountant and tax lawyer, since inheritances are not taxed as income. It’s true that most estates are not taxed (unless they meet the taxable threshold, a whopping $11 million in 2019), and that the IRS does not consider a cash inheritance to be taxable.
But some parts of an inheritance may still necessitate payment. For example, if you are left property and that property appreciates after the person’s death but before you have sold it, you might need to pay a tax on the appreciation. Or, if you are left a rental property, you’ll likely have to pay tax on the income that is continually produced from the tenants. You’ll want to work with an accountant or tax lawyer to sort these types of things out.
What’s more, if any of the money was in the deceased person’s I.R.A. when they died (a common occurrence), you’ll need a professional to advise you about how to handle the money so you don’t get hit with an unexpected tax burden. The Times article describes one man who moved a substantial amount of I.R.A. money directly into his brokerage account—and suddenly owed $200,000 in taxes.
Since an inheritance may be the most money many people will ever get at one time, it’s important to consider how this gift can meet your lifelong needs. If you don’t have money in an emergency fund, or haven’t put away enough for retirement, these are probably better bets than blowing a wad in Monte Carlo, however fun that might be. Your financial advisor can help you plan for the most appropriate, diversified portfolio for your needs and situation.
This is not to say you can’t do some wonderful things with inheritance money. Once you’ve passed through the decision-free zone, spoken with professionals, and made your smart money moves, you may be able to treat yourself a little or to do things that honor the deceased. It can feel good, say, to go to Israel and plant a tree in honor of a parent who always supported that country. Or to give some money to a charity to help fund a potential cure for the disease that felled them.
Just keep in mind that the best way you can honor a loved one who cared enough about you to leave you an inheritance is to care enough about yourself to take care of your own future needs.
Have the Law Office of Gary M. Landau by your side. The Law Office of Gary Landau is located in Coral Springs, Florida, and is rated 10 out of 10 by the legal website AVVO. For more information or a free phone consultation, call 954-979-6566 or email us. Attorney Gary Landau personally returns all calls to him.
Law Office of Gary M. Landau P.A.
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Coral Springs, FL 33067
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