Losing a loved one is a deeply personal experience. Whether the passing of a loved one is sudden or long expected, what follows is an emotional journey. Grief, loss, and uncertainty can exist alongside many decisions to make and tasks to complete. These feelings are often made more complicated when a sizeable inheritance is involved.
For beneficiaries, whether or not they were financially comfortable before receiving an inheritance, an increase in their wealth can expand their possibilities in ways that feel unfamiliar and even disorienting. For many people, a sudden influx of funds may clash with an identity they’ve held on to for many decades. It can even produce feelings of guilt. Learning to inhabit that new reality by working with the right partner and taking time to clarify your goals are some of the keys to navigating this transition with knowledge and confidence.
Build Your Team
It’s perfectly normal to feel overwhelmed, especially for inheritors who are also executors or trustees of an estate. An important step is to recognize when you would benefit from a trusted decision-making partner. Assembling a team of advisors who genuinely put a beneficiary’s interests first is essential. It may make sense to continue existing relationships with the professionals that you already work with, such as a tax preparer, estate planning attorney, and financial advisor. At other times, a significant change in your financial situation calls for a different team with deeper expertise in your unique situation.
Give Yourself Time
Once the settling of the estate is underway, the next step is to slow down and take time to clarify your goals. Many beneficiaries feel pressure to do something immediately. Some of those actions may be right for your situation, but many are better made after time spent reflecting on your own values.
Is there a special way to honor the legacy of your loved one? Looking inside, what does a full and meaningful life look like to you? Are there goals you had once dreamed about, such as financial independence, supporting causes you care about, or helping family members, that this inheritance might make possible? The team you’ve assembled can help you articulate those goals and translate them into a plan. They bring perspectives from different angles, notice things you might overlook, and help prioritize which decisions are urgent and those that can be addressed in the future.
An Evolving Landscape
The framework for inheritance has evolved in recent years. The tax law signed last year permanently raised the federal lifetime tax exemption to $15 million per individual and $30 million for married couples, indexed for inflation going forward. Since most estates fall below this threshold, it’s unlikely that federal estate taxes will apply. However, 17 states impose their own estate or inheritance taxes with much lower thresholds, including Washington, Oregon, and New York. Californians, on the other hand, do not need to worry about either tax at the state level, since the Golden State does not impose any.
Another important recent change is that those inheriting a retirement account from someone other than a spouse, in most cases, have up to 10 years to disperse funds out of the account. This replaced a previous rule under which beneficiaries could do so throughout their lifetimes. There are additional rules regarding how much of the account must be distributed each year, depending on the age of the person who passed. While planning for this additional income, it’s important to understand these requirements and how the income and tax liability fit into your overall financial landscape.
Financial, legal, and tax laws often change from year to year and can be challenging to keep up with. Your team of financial advisors can take into account current laws and help bring your goals to life while avoiding costly missteps.
A Partner Through the Process
Receiving an inheritance is at once an emotional experience, a legal process, and often a financial turning point. Navigating all three simultaneously with their complexities requires not only technical know-how but also patience and a nuanced understanding of the individuals involved.
At North Berkeley, we work with our clients through their inheritance journey. Although we place a large emphasis on the financial aspects, we also take into account the whole person, including shifting identities, family dynamics, and the wish to honor the loved ones they’ve lost. We believe that sound financial decisions are built on a thoughtful understanding of both the person leaving the legacy as well as the person carrying it forward.
Resources:
[1] https://taxfoundation.org/data/all/state/estate-inheritance-taxes/
