Managing an inheritance

This article from Heritage Financial Consultants draws on the same core materials that are included in the management consulting program for Levin Group clients. By gaining a deeper understanding of their financial situation and the options available, dentists can make informed decisions that will enable them to reach their retirement goals sooner.
— Roger P. Levin, DDS

John G. McCarthy III is a partner with Heritage Financial Consultants.

An inheritance in the form of cash, real property, jewelry, or stocks can enrich your life in many ways. But bequests -- depending on the type and amount -- can have a profound impact on your financial planning. The key to successfully managing any inheritance is to plan before you act.

Certain types of inheritances may require you to make some decisions right away, but it's crucial to be conservative in your actions and allow yourself some time to grieve. Then, work with financial advisors to maximize the value of your inheritance and decide on next steps. If you received a large amount of cash, for example, you may want to reinvest a portion of it, share some of it with family members, or use a percentage of it for an extended vacation. Your options depend on your personal and financial circumstances, level of practice debt, long-term goals, and the type of inheritance involved.

Fast money

Cash inheritances are the simplest assets. Your financial planner can help you determine the impact the money could have on your short- and long-term goals. This will help you refine your financial objectives, such as saving more for retirement, investing in facility and technology upgrades for your office, or paying down outstanding loans.

If you receive a cash inheritance, keep in mind that probate information is publicly available, so you may receive unwanted solicitations for investment schemes. Seek counsel from a qualified financial advisor before risking any money. You may want to place the funds in a money market account until you can meet with your advisors.

In addition, consider placing investments where your exposure to personal or professional liability claims is limited. You should speak with a tax attorney if the inheritance substantially increases the size of your estate.

Family or company stocks

Many people leave their favorite stocks to family members. Maybe your aunt worked for the company, or your uncle believed in the organization when it was just a start-up. But when deciding whether to keep stocks, it's crucial to determine if they're an appropriate asset for you based on your personal investment philosophy. Assess how the stocks affect your investment portfolio's diversification profile, risk exposure, and tax bracket.

If you inherit stocks, most capital gains can be lessened by revaluing the stock to the date of the grantor's death. For example, if your grandmother purchased stock for a $10 base and the stock is worth $150 today, the capital gain would be assessed on the difference of $140 if the stock were sold. But if she passed away and left the stock to you, the base value of the stock is $150, adjusted to the day of her death. This decreases capital gains liability by the time you receive the stock.

Property values

If you inherit real property, its value as an asset or liability is largely determined by whether you plan to live there, rent it, or sell it. To understand the cost factors involved, review the property and tax laws pertaining to the asset, along with any maintenance fees or property management costs. Then, balance that against any rental income, if applicable. If you want to sell the property, consider the capital gains implications and the time and cost of waiting to liquidate it at the best price.

Jewelry and collectibles

Most people inheriting jewelry or collectibles will view them as family heirlooms, not as assets. While an estate planning attorney can determine a valuation for each item, you should get a neutral, certified appraisal of each item for insurance purposes. You may also need to obtain a separate insurance rider against loss. Jewelry and collectibles appreciate, so be sure to update your insurance every three to five years. Working with your advisory team and using strategic planning can help you preserve and enhance your inheritance.

Plan ahead

If you expect that some assets may eventually be passed on to you, speak with the grantor to determine the optimal way to receive the gift or bequest. Planning ahead can help you minimize any tax liabilities, while enabling you time to talk to a financial advisor about the best way to manage the inheritance.

John G. McCarthy III is a partner with Heritage Financial Consultants and a registered representative of Lincoln Financial Securities offered through Lincoln Financial Advisors, a broker-dealer (Member SIPC) and investment advisory. Heritage Financial Consultants is not an affiliate of Lincoln Financial Advisors. Lincoln Financial Advisors does not provide legal or tax advice. CRN-1559901-080116

Disclaimer: The comments in this article are not meant to be taken as financial advice. Levin Financial Group recommends that you always consult with your financial planner before making any significant changes in your financial situation.

The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.