What to Do With an Inheritance?


Family Portrait - Montreal 1963

Research indicates that the majority of the baby boom generation will receive some kind of inheritance.

With the economy the way it is these days, most baby boomers are not expecting to receive a windfall.  But investigations at the Center for Retirement Research at Boston College indicate that, as the parents of the sandwich generation pass away, around 70% of boomer households will receive inheritances.  These bequests might not be enough to buy your own private island.  But, with a little planning, they may be enough to help you pay off your mortgage or assure you a more comfortable retirement.  Here are a few ideas for how to best manage inheritances.

If you inherit an IRA from your parent or spouse, your best plan of action may be to leave the money in that account and take required minimum distributions based on your life expectancy.  The allows you to stretch out the withdrawal period and, hence, the tax benefits.  If you don’t need the money in the IRA, you might get an even greater benefit by disclaiming this part of your inheritance in favor of your children.  Because of your children’s longer life expectancy, passing the account to them could stretch out the payments even further, allowing the money in the account to grow, tax-free, for an even longer period of time.

Conversely, if you are not inheriting a retirement account, it might be wiser to spend your inheritance on living expenses instead of saving it.  For example, if you’re working and not contributing the maximum amount to your 401(k), using inherited money for day-to-day expenses might allow you to put more of your income into your retirement accounts.  Most private employees, age 50 and older, can contribute $22,000 of income per year to a 401(k) account and an additional $6,000 per year to an IRA.  Using some of your inheritance for living expenses now could allow an equivalent amount of your pretax salary to grow, tax-free, until your retirement.

Remember that, in California, an inheritance is the separate property of the spouse who received it.  In some instances, maintaining your inheritance as separate property can reduce the amount of estate or gift taxes ultimately paid when that inheritance is passed on to your children.  It can also shield the inherited assets from your spouse’s creditors and may help your spouse qualify for Medicare or Medi-Cal benefits.  To maintain the inheritance as separate property, don’t “co-mingle” it with community property assets by, for example, depositing it into a joint account or purchasing property in both your names.

Whenever you receive an inheritance, you should also check whether this extra money has put you into estate tax territory.  There is effectively no state estate tax in California and this year, U.S. citizens and residents can pass up to $5 million to their loved ones without  paying federal estate taxes.  But the federal estate tax exemption is currently in flux.  In 2013, this exemption is scheduled to be reduced to $1 million, which may cause a significant number of people in Silicon Valley to have a federal estate tax liability.

For help making an estate plan that accommodates your inheritance and minimizes the impact of estate taxes, contact Christl@DeneckePlanning.com or see DeneckePlanning.com

Helping you plan for your family’s future at every stage of your life.

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