Why Everyone Needs an Inheritance Strategy

Of all the financial strategies that many people have in place, an inheritance strategy is usually not one. Discussing estate planning amongst family members can be uncomfortable even with the best relationships, let alone discussing the contents of an estate strategy and what you may be inheriting after your loved one is gone.

But having a plan in place can save you headaches down the line. Losing a loved one is difficult emotionally and logistically, but having an inheritance strategy in place can make your life easier down the road.

Inheritance With A Will

Having a will in place helps designate beneficiaries and determines who receives what. Wills can help avoid probate court’s costly and time-consuming nature, although it may not prevent it entirely. Of course, a will doesn’t prevent anyone from contesting it, but it does tend to make things easier. Knowing if you are one of the designated beneficiaries—and having an idea of what that inheritance looks like—can help you plan for what happens when you inherit cash or other assets.¹

When No Will Exists

Not having a will can make receiving an inheritance painful. Sorting out an estate can result in steep legal fees, dealing with probate, and potentially fighting with family and friends. If you’re not sure exactly what the estate entails, it could take months or years to track everything down. Then there’s the personal cost. Even if everyone agrees on how the estate should be settled, the process often takes a financial, mental, and emotional toll.²

If there are assets other than cash to divide up, sorting through an estate without a will becomes exponentially more complicated. Life insurance, real estate, and assets other than cash may be subject to different inheritance rules. Spouses often receive additional tax breaks and incentives for an inheritance, and many adult children and other relatives don’t have that luxury.^2,3

Creating an inheritance strategy also allows you to help make sure your loved one’s estate is in order. You don’t want to wait until after your loved one is gone to discover, for example, that an ex-spouse is still listed as a beneficiary on a life insurance policy.

The Pitfalls of Inheritance

While many of us dream of a lump sum of cash falling into our laps, the reality of inheritance can be a little less rosy. Cash typically doesn’t fall under the heading of taxable income, but if you received that income in the form of royalties or the deceased’s company bonus, that might have the IRS view this as a source of income.⁴ Inheriting real estate means that you now have a property that requires maintenance and upkeep as long as you hold onto it. And while it used to be easy to shelter stocks and mutual funds into a so-called “stretch IRA,” the SECURE Act abolished this option for everyone but a surviving spouse or minor child.⁵

Don’t Quit Your Dayjob

Just because you’ve received a large inheritance doesn’t mean it’s time to quit your day job and retire to luxurious living on a tropical island. According to the National Endowment for Financial Education, an estimated 70% of people who receive a large inheritance spend it all within a few years.² Having a plan can make it easier to stay on track before the temptation to spend hits your bank account.

Even in the best circumstances, dealing with an inheritance can be complicated. Remember, even if you’re not expecting a large amount of money or property from an estate, it still behooves you to have a strategy in place. It’s important not to make any significant decisions or to suddenly change your spending habits just because more assets are now available to you. We want to work with you to make sure your inheritance is working for you, not against you, and ensure all of your goals met are now and into the future.

Financial Checklist for when a Spouse Passes Away

When your spouse passes, not only is it a terribly difficult time but you may also find yourself with a long list of things you need to set in order. Planning a funeral, paying bills, closing/moving accounts. This may feel overwhelming and endless, especially during a time when you are also grieving.

Here’s a simple checklist to help you through this difficult time.

https://www.peakeadvisors.com/site/quick-download-button/financial-checklist-for-when-a-spouse-passes-away/

1. https://smartasset.com/investing/how-does-inheritance-work
2. https://www.kiplinger.com/article/investing/t064-c000-s002-smart-ways-to-handle-an-inheritance.html
3. https://www.hrblock.com/tax-center/income/other-income/is-your-inheritance-considered-taxable-income/
4. https://www.marketwatch.com/story/inheritance-estate-planning-and-charitable-giving-4-strategies-to-reduce-taxes-now-11645140214
5. https://www.forbes.com/sites/davidrae/2022/02/22/how-to-minimize-taxes-when-you-inherit-an-ira/

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Chesapeake Financial Advisors is a fee-only financial planning, investment advisory, and tax planning firm with offices in Towson, Columbia, Frederick, and Chevy Chase Maryland.

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