February 27, 2019

What Do Heirs Need to Know?

The death of a loved one brings with it many emotions and, when it comes to finances, lots of questions. One of the questions that commonly arises is what beneficiaries should be asking when they learn they will be inheriting assets. Here is a short list of questions for you to start with:

  1. What will you be inheriting? Understanding exactly what you will be receiving is the first step to a smooth transfer of assets. If you are the beneficiary of an insurance policy or a retirement account, it is likely you’ll need to file a beneficiary claim form with the appropriate financial institution(s). If you are receiving assets as the beneficiary of a decedent’s Last Will, you will probably receive a check (or some other asset transfer) under a court-ordered distribution at the end of a probate filing. The more details you have about what kind of asset you’ll be receiving, the easier it will be to facilitate the transfer.
  2. With whom will you be sharing the inheritance? Are you receiving shares of a business like an LLC, where you may suddenly own a piece of an operating business and have some new business partners? Did you receive a portion of a trust from your parents, where you and your siblings are all beneficiaries of the same trust? If you are the sole beneficiary, you’ll likely have full control of things once they are transferred. If not, it is important to determine exactly what your rights are and to gain an understanding of what you should expect from your ownership interest.
  3. When will you be receiving your inheritance? Probate can take anywhere from a few months to a few years. Insurance claims, on the other hand, are often filed and paid out within a month or two of the decedent’s death. If you are to be the beneficiary of a trust, it is entirely likely the distributions will be paid out to you over a period of years – either at set intervals or as the trustee determines it appropriate under the trust terms. Many retirement accounts will force the beneficiary to begin withdrawing funds shortly after the primary account holder passes away. If you receive word that you are going to inherit assets, ask the appropriate questions to determine when you’ll be receiving assets and whether there are strings attached to them once you do.
  4. Will you be responsible for paying any taxes? Most Last Wills and most Revocable Trusts include tax apportionment clauses. These paragraphs designate the parties responsible for paying any estate taxes due when someone dies. In some cases, taxes will be paid “off the top,” while in other cases, each beneficiary is responsible for a portion of the taxes due. Some beneficiaries are surprised to find that they may also owe income taxes on funds they inherit. If you are receiving assets that were previously held in a retirement account (IRA, 401(k), etc.), then you’ll likely be responsible for including distributions from these accounts in your taxable income each year and, therefore, paying income tax over time as you withdraw the funds.
  5. Who gets things if you elect to not receive them? Many estate plans between married spouses are built around the idea that the surviving spouse may disclaim assets at the first death. This means that, when the first spouse dies, the survivor may elect not to inherit that which was left to him or her by their deceased spouse. This is usually done so that disclaimed funds can then flow to a surviving spouse’s trust. There are a variety of tax planning reasons why this sort of strategy makes sense, but it is also worth noting that a disclaimer can also work between non-spouses. If you do not need the funds being left to you, or if you have already engaged in significant planning in order to reduce the size of your own estate, talk with your legal team about whether disclaiming the assets (PRIOR to receiving them) makes sense.

Once you have determined the answers to these questions, there are two final things you should consider. First, inheriting substantial assets can put a bit of a target on a beneficiary’s back in today’s litigation-rich society. We review umbrella insurance coverage for all of our clients and would advise anyone receiving an inheritance that they ought to review their coverage – umbrella policies offer some of the least expensive insurance policies and they can protect against substantial claims. The second thing you ought to do is sit down with an independent financial planner who can walk you through how the expected inheritance changes your cash flow, debt, retirement, and savings pictures. Once you have figured out how the inheritance changes your overall picture, you can invest accordingly.