January, 2004 Tax Tip

Inheritances

I frequently receive inquiries from clients relating to the tax aspects as well as non-tax issues involving inheritances.   These beneficiaries of estates seek advice on how to manage the assets at a time when they are dealing with a host of emotional issues. 

First of all, the good news is that an inheritance is exempt from income tax.  However, any income that is subsequently earned on the inherited property is, with limited exceptions, taxable to the beneficiary.  The tax basis (cost) of the property is generally its value on the date of death of the decedent.

As to the non-tax issues, the following tips are offered regarding practical and emotional handling of an inheritance:  (NOTE:  While it is easy to recommend these practical tips to someone else, I cannot say for certain whether I would personally observe all of them if faced with the situation.)

1.  Don't be too quick to sell property or select investments.   Seek the advice of professionals and/or friends that you can trust as having knowledge in the area of investments and property and money management.

2.  People will come out of the woodwork when they find out you have money.  Don’t make any pledges, gifts, or investments until you have evaluated your finances and set financial goals for your life and charitable desires.

3.  Safeguard your inheritance. Be certain all property and valuables are safe and insured.

4.  Don’t rush in to tell your boss what to do with his job and don’t fire yourself if you are self-employed.   Many people greatly underestimate the amount of money it would take to provide them enough income for the rest of their lives.

5.   Don't move to a new location or make other major lifestyle changes until your emotions have settled down.  Wait until you can make a rational, rather than emotional, decision.

6.  Pamper yourself.   Set aside a small part of your inheritance to treat yourself  to something you would really like, such as a new car or a trip.

7.  Be sensitive to your spouse or significant other as you ponder your decisions about your inheritance.  Hurt and resentment has undermined many a relationship.

8.  Get expert help.  Depending on your situation, you may need help from an attorney, an accountant, a financial planner, and a money manager to name a few.  Your best investment is to get good advice.

9.  Try to be objective.  We tend to be emotionally attached, sometimes to excess, to items a loved one owned.

10.  Make your own estate plan.   Often an inheritance can push one’s assets to levels where proper planning becomes critical.  Many times clients have told me that they never dreamed they would ever have a need for estate planning.  Actually, as a tax practitioner for over thirty-five years, I have learned that  no matter what the value one’s estate is, there should always be at least a basic estate plan.

Have a Healthy and Prosperous 2004!!