Receiving inheritance money is a bittersweet gift. On the one hand, receiving unexpected money can solve debt problems or allow recipients to save for the future. On the other, being named as an heir means a loved one has died.
Receiving inheritance money can change people’s lives for the better, as long as funds are managed wisely. It is not uncommon for heirs to embark on spending sprees when receiving financial windfalls. Sometimes this occurs as a reaction to grief, but it is often caused by lack of money knowledge.
Decedents bequeath inheritance gifts through their last will and testament. Upon death, the last Will is presented to probate court and the estate must be settled according to state probate laws. When a person dies without executing a last will, inheritance property is distributed to direct lineage heirs such as a surviving spouse, children, and siblings.
The duration of probate can extend for several months. Inheritance property cannot be distributed until the estate is settled. The estate is responsible for outstanding debts and taxes. If the estate does not have sufficient funds to pay debts, the estate executor may be required to sell assets to cover expenses.
Decedents can engage in estate planning strategies to keep certain assets out of probate. Individuals with checking and savings accounts can assign payable-on-death beneficiaries to automatically transfer inheritance cash. Forms are available at financial institutions and only require beneficiary names, addresses, and social security numbers.
Upon death, estate administrators obtain date-of-death values from the bank. These forms are submitted to the county tax assessor. As long as decedents are current with taxes, the forms are signed and returned to the bank. Beneficiaries must provide photo ID and a copy of the decedent’s death certificate to claim the funds.
Individuals with financial portfolios can assign transfer-on-death beneficiaries. A similar protocol must be followed before distribution occurs. Heirs can elect to transfer investment portfolios into their name or they can elect to cash-out investments. Heirs can avoid estate taxes by transferring financial investments. When cashing out investments, heirs may be subjected to federal and state taxation.
Titled property such as real estate and motor vehicles can be titled jointly or with survivorship rights. It is recommended to consult with a probate lawyer when transferring titled property. Real estate transfers must be recorded through the court. Not all states allow survivorship rights for motor vehicles, so it is important to determine the proper strategy.
Individuals can also bequeath inheritance money while still alive. The IRS allows gifting of $12,000 per individual and $20,000 per married couple, per year. Gifting cash prior to death ensure recipients receive the money, while keeping cash out of probate.
Beneficiaries who receive cash gifts of more than $5,000 should consult with a financial planner to establish investment strategies. Working with professionals allows heirs to review a variety of investing options and avoid estate taxes.