In last week’s post we outlined issues to consider when it comes to investing an inheritance. This week, we’ll look at a case study for someone receiving an inheritance. We believe financial advisors should keep client information confidential, so the account below is fictional. However, it is reflective of many of the issues our clients encounter when receiving an inheritance.

Financial Advisors

Jen’s father was a child of the Depression, and he drew a few financial lessons from that difficult time. First, don’t put all your eggs in one basket – make sure you have multiple bank or brokerage accounts. Second, income in hand is worth more than future growth – so buy stocks in blue chip companies that focus on dividends. Finally, make sure you have a backup in case everything goes south, and the best bunker investment is gold.

Jen’s mom had never been involved in the finances and they had not worked with financial advisors, so when her parents passed away in rapid succession, it fell to her to pull everything together. Fortunately, her dad never threw anything away, so via a combination of going through statements, tax returns and the safety deposit box, she was able to put together a list of all the assets. It was also extremely helpful that her father stayed on top of his estate planning as well, so Jen was both executor of the estate, and beneficiary of the various retirement accounts and a few small insurance policies.

When Jen began working with us as her financial advisors, she knew what the estate contained, but she still had a number of questions, including:

  • What tax, if any would be due
  • How the inheritance would impact her plan
  • How to incorporate the assets into her portfolio

To help answer the first question, we consulted with the accountant that Jen had been working with in settling the estate. There was no estate tax due given the now extremely-high estate tax exclusion, and Georgia didn’t levy an inheritance tax. Jen had inherited two IRAs, and we outlined the rules for inherited IRAs and provided an estimate of how much she would be required, per IRS rules, to withdraw every year.

One other tax issue we examined was the cost basis for the assets she inherited. Things were a bit more complex here, as she inherited assets outright and she also inherited assets from a trust that was established by her parents when the estate tax exclusion was much lower. As a result, she had some assets that received a step-up in basis when her dad died and some that had a very low basis that was established when they were purchased years before.

Once we had a good overview of the assets that Jen was inheriting and what the tax situation was, we worked with her to determine how the inheritance would impact her financial plan. She was splitting the estate with her brother, so determining her share was straightforward. The impact to her plan was substantial, given that she would be inheriting several million dollars. She had planned on retiring at normal retirement age, but the inheritance gave her the flexibility to move up retirement a number of years if she so desired. Furthermore, one other thing she had inherited from her dad was a dislike of debt, so she decided to pay off her mortgage.

Re-configuring her portfolio to support her plan was a bit of a challenge given the number of holdings and the fact that some had a low basis (and would have resulted in high capital gains tax). We worked with her to consolidate accounts and map out a multi-year plan covering the trades we would make in our ongoing role as her financial planner. The end result would be a simpler, more diversified portfolio in line with her risk tolerance and return needs. Lastly, we helped her research charities that supported the homeless, as that had long been a cause her parents supported.

Do you find yourself in need of financial planning advice as it relates to inheritance? Contact Minerva Planning Group today.