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handling inherited investments

Handling Inherited Investments?

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Receiving an inheritance can be a double-edged sword. On the one hand, it's overwhelming, thanks to the intense emotions associated with losing a loved one combined with the confusion about what to do with the newly acquired assets. On the other, an inheritance can re-invigorate your finances and create new opportunities for you and your family.

If you are soon to receive a distribution from a will or trust, there are a few things to consider when handling inherited investments. Wealth Advisor’s recent article entitled “How to Handle Inherited Investments” provides us with some of the top considerations:

Consider Cash. Besides cash, the most common inheritances are securities, real estate, and art. These assets usually go up in value, but another big benefit is their favorable tax treatment. After someone dies, for income tax calculations, it is as if these types of assets were purchased on the date of death, so capital gains are essentially wiped out.

The heirs won’t pay capital gains on unsold investments that went up in value during the lifetime of the deceased (estate taxes would apply). Those taxes would only apply to the gains that happened after they took possession.  There’s a good reason to hang onto these type of investments. They also carry some risks, so you may consider putting some of your inherited investments into cash, cash equivalents, or life insurance with a guaranteed payout to avoid exposure to undue risk. Consult a financial advisor who can help adjust things to your proper risk tolerance.

Beware of Concentration Risk. It’s not unusual for an inheritance to be heavily concentrated within a specific asset. While the deceased’s instincts may have been accurate at the time of their initial investment, there’s no guarantee that their strategy will continue to pay dividends in the long term.  The decedent may have kept a large position in one company to avoid paying capital gains at the sale. However, after death, the property receives a new tax basis, and some or all of it can be sold without that capital gain.  Diversifying into other areas—even with high-volatility vehicles that are unrelated to the original inherited investment—can lessen that concentration risk. An even safer strategy would be to build a portfolio of diverse holdings that includes multiple asset classes across different sectors.

Learn about Trusts. Sometimes when people inherit assets through a trust, they don’t think it’s critical to require anything but a superficial understanding of how these work. This is because the trustee assumes nearly all the fiduciary duties. However, this could change when a beneficiary attains a certain age, which often triggers the dissolution of the trust, or stipulates a transfer of trustee responsibilities to them. You should understand what will happen at that point. You may want to create your own trust to distribute part or all of your unmanaged inherited assets to heirs in a framework that suits you best, and without having to go through the probate process. In any event, you should learn how trusts work and the difference between revocable and irrevocable trusts. Ask your estate planning attorney about your specific situation and whether there is a trust that may be best for your circumstances.

Pause before spending. Research shows that the average inheritance lasts five years. If you haven’t had significant assets to spend before, it may seem that the funds will last forever. They won’t unless you are thoughtful in handling inherited investments. Carefully consider how you should use this money, and think of it as though you had saved it yourself. By doing so, you can.


Reference: Wealth Advisor (Jan. 7, 2020) “How to Handle Inherited Investments”