10 Things to Know About Managing Estates and Inheriting Money

Receiving an inheritance can create all sorts of emotions. Gratitude, sadness, excitement, or confusion, just to name a few. And with all of these emotions swirling around, it can be hard to know what decisions you should make. If you have questions or need any guidance, we're here to help. Feel free to call 919-391-3446 or email us at info@rosewoodwealthmanagement.com.

1) If you’re handling the estate, get at least 10 copies of the death certificate.

In some cases, you might need 20 copies. Banks, investment managers, life insurance companies, government agencies, creditors, unions, membership groups, and many other organizations aren’t going to talk to you at all about your loved one’s financial matters until you produce a death certificate. And if your loved one used a couple of banks, a couple of investment firms, and had an array of other professional relationships, you’d be surprised how many copies of the death certificate you’ll end up needing.

2) Contact companies or organizations that your loved one has been sending money to on a regular basis.

This could include any bills or subscriptions that are being automatically drafted and need to be cancelled. If there’s any outstanding debt, creditors should be notified and you should get a clear understanding of how much is owed. From there, you can formulate a plan for the best way to pay off these debts.

3) Notify the people who should stop paying your loved one.

Obviously, if your loved one was still working, their employer probably knows by now that they’ve passed away. But it’s worth a call to that employer to get a clear picture of how much might be owed in a final paycheck and when you can expect to receive that.

Any pensions or annuities that have been paying out should be notified of your loved one’s death.

4) Notify the Social Security Administration.

If your loved one was receiving Social Security, that payment obviously needs to be stopped, but there are other reasons to contact the SSA.

It’s not much, but they do pay a one-time death benefit of $255.

More importantly, the surviving spouse or children may be eligible for monthly survivor benefits from Social Security.

The agency will also put your loved one’s name on the Master Death Index. This prevents fraudsters from collecting a deceased person’s Social Security payments and helps keep identity thieves from opening accounts in the name of the deceased person.

5) Understand that beneficiary designations override a will.

If your loved one has life insurance policies, IRAs, or other accounts with a designated beneficiary, the individual(s) listed will be the beneficiary, regardless of might be stated in the will of the deceased.

Many people have gotten divorced and then married someone else but forgotten to change the beneficiary on their life insurance. At their death, the ex-spouse is still listed as the beneficiary and is the recipient of the life insurance money.

It doesn’t matter if common sense dictates that the money should go to someone else, and it doesn’t matter what the will states. If you’re in a situation where you think the beneficiary designation isn’t what was intended by the deceased, you’re wasting your time in trying to fight it. The courts have been clear and consistent on this.

6) Don’t forget about a final tax return.

You’ll need to file a final tax return for your loved one for the year of his or her death. If your loved one was unmarried, the tax return covers the period from January 1 through the date of death. If there’s a surviving spouse, the final return can be filed as a joint return as if both spouses were still alive at the year’s end.

If the deceased had significant medical expenses that were accrued but not paid before death, you’d be wise to consult a CPA before filing the final tax return as you might be able to deduct some of those medical expenses, depending on the situation.

7) Understand stepped-up cost basis.

 The tax code provides a significant benefit to you as the recipient of inherited assets thanks to a concept known as “stepped-up cost basis.”

Here’s the easiest way to understand it: Suppose that your parents bought a house that they used as a rental property back in the 60s. Let’s assume they only paid $40,000 for the house back then, but now it’s worth $140,000. If they sold it while they were still alive, they’d have to pay taxes on their capital gain, which in this case is $100,000 (Present value of $140,000 – cost basis of $40,000).

However, if you inherit the house, your cost basis is the value of the home on the day of their death, so you can sell it for $140,000 and pay no capital gains taxes.

But suppose you keep the house for 10 years before selling it. Now you’ll have to pay taxes on any growth that the property experiences in those 10 years.

This same concept applies to stock or any other asset that grows over time.

So, sometimes it can make sense to sell assets like this fairly soon after inheriting them, instead of putting it off for several years, thinking you’ll just deal with it down the road. You might miss out on some opportunities for tax efficiency if you wait too long.

8) With a house, bills and debt trump sentimentality.

 If you inherit any real estate—a house, a farm, or undeveloped land—it can be tempting to hold on to it because of sentimentality. This is especially true if it’s the home you grew up in.

And sometimes, keeping it might be just fine. Maybe there’s another family member who wants to live there, maybe you can turn it into a rental property, or maybe you want to move in yourself.

But too often, people err on the side of sentimentality over logic with properties like this. If the home still has a mortgage, it can be expensive to keep it going. And even without a mortgage, the cost of utilities, maintenance, property taxes, and HOA dues can add up too.

If the house isn’t providing any benefit to justify the expenses, don’t let sentimentality cause you to wait too long before selling it.

 9) Don’t spend without a plan.

The average inheritance is gone in 14-17 months.

That statistic seems nearly impossible to believe, but it probably stems from the same issue that plagues professional athletes and lottery winners. Most athletes end up bankrupt within a few years of retiring, and most lottery winners are out of money within a few years of winning.

How is that possible? Because most professional athletes and lottery winners didn’t have great financial instincts when they first became rich. And being rich doesn’t automatically make you a good steward of money. So…easy come, easy go.

The same is often true with people receiving a big inheritance. If your inheritance is a lot more money than you’ve ever had before, it can seem like it will last forever. But if you don’t handle it wisely, it can be gone before you know it.

Have a plan and let the plan dictate your spending.

10) Think about how you can use your inheritance to honor your loved one.

We often see people who inherit large sums of money that they don’t really need. They earn a good living, have done a good job of saving for themselves, and don’t have any specific use for the money they inherit.

In cases like this, we recommend finding ways to use the money to honor the person who left it behind.

Were they passionate about education? Maybe it makes sense to endow a scholarship in their name at a university they loved. Or maybe the money stays in the family but is used to fund college expenses for grandchildren or great-grandchildren.

Did they have charities or causes that they cared about? Maybe the money can make a big impact for a good cause.

Whatever makes the most sense for your family, it’s important to be a good steward of your inheritance, managing the money as efficiently as possible from both an investment and tax perspective.

For financial and investing guidance, call us at 919-391-3446 or email us at info@rosewoodwealthmanagement.com.