349. Inheriting Money: What to Do First?

Over the next two decades, an estimated $124 trillion is expected to pass from one generation to the next. For many people, receiving an inheritance can feel overwhelming. The first challenge usually is not deciding how to invest the money. It is knowing what to do next.

In this episode of A Wiser Retirement® Podcast, we discuss the first steps to take after receiving an inheritance, the common mistakes to avoid, and why it is important to pause before making major financial decisions. An inheritance often comes during a difficult season of grief, family responsibility, and emotional decision-making, which makes having a clear plan even more important.

Related Podcast Episodes: 

Ep 283. How to Manage a Sudden Money Windfall: IPOs, Business Sales, or Inheritance

Ep 278. Avoid These Common Mistakes After Receiving a Large Inheritance

Related Financial Education Videos:

What is the stepped up basis loophole for inherited assets?

Inheriting a Property: Keep, Sell, or Rent?

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Transcript

The Coming Inheritance Wave

SPEAKER_03 0:00

Over the next two decades, an estimated 124 trillion will change hands from one generation to the next. Yet for the person receiving the inheritance, the first challenge usually isn't investing the money, it's figuring out what to do next. Today we will walk through the first steps to take before making a major financial decision.

SPEAKER_01 0:18

Welcome to a wiser retirement podcast, where we cut through the noise and bring you real, honest conversations about investing, retirement, and building lasting wealth. No sales pitches, no gimmicks. Just insights to help you stop guessing and start planning your financial future.

Meet The Hosts And Guest

SPEAKER_03 0:37

Welcome to a Wiser Retirement Podcast. I'm Casey Smith. Today I'm joined with financial advisor William Medcalf. We'll be discussing when you inherit money, what should you do first? Hey, William.

SPEAKER_05 0:47

Hey, how's it going?

SPEAKER_03 0:48

Pretty good? Yeah. You having a good summer? Yeah, I am. How about you? Are you tired of horses yet? I just came back from Maryland with my daughter and one of her horses. Uh she win

Horses Golf And Office Life

SPEAKER_03 1:00

it to the Young Rider Championship. Um, this is the third year she's qualified, and two years she got third place, which is uh actually they they do medals, gold, medal, uh gold, silver, and bronze just for this show. That's not normal. Uh and so they used to be called the junior Olympics, uh Equine Olympics or something like that a long time ago. Now it's just Young Rider Championship. So she she did well. Um so in in uh she does English eventing, and in in that space, there's five levels. Uh so she is at the three-star level. There's a four-star level, uh, not for juniors, um, that's adults, okay. Five-star level. There's only two five-star tracks in the US. It's Maryland and um Kentucky Horse Park. Oh wow. Oh wow, yeah. So and even the even the Olympics is usually a four-star level track. Okay. Um so five-star is uh it's uh it's a big deal. There's the Kentucky three-day, probably 16,000 people come out to to watch that. But uh for her, uh being 18 years old to be at three star is really special. Yeah. Um so anyway, I think she had been like six plays, so top ten finish, uh, which is good. They have they invite um you form a team in your region. So there's like eight regions. Okay. And there's five people in the team, they drop one score. So they they take best four out of five. Okay. So they get the team area three, which is the southeast, they got um second. Oh, great. So she get a medal for that. Yeah. So it's just um uh it's it's five days, and anybody who probably most people don't know this world at all, but uh you know, you have the flat work the first day. There's like the horse movement. I think uh Snoop Dogg was famous in the Olympics by saying, Look at the horse's crib walking. That's uh it's just my reel, anyway. Uh so there's the the sage portion, so it's a flat work, and then the second day is cross-country. That's that's the adrenal for the adrenaline junkies. Yeah, it's huge, huge uh shelves and all over the woods and in the fields and stuff that they jump. Uh three-star has five more jumps than the rest of them, so it's more of it's a bit of an endurance built in. And her horse, Henry, who's a nine-year-old Irish sport horse, uh, he's just got to build more muscle. Um, so he he gets a little tired near the near the end. So it's all about making time and then don't not refusing jumps, right? Yeah. So I think she was in 11 seconds of the time, okay, uh, which is decent. Uh nobody made time uh because the horse was pretty tough. And then the last day is uh jumping the poles. You see that pretty often and show jumping, right? Which is another discipline in itself, but they bring that into uh eventing as well. So it's three different phases, and those phases take what five minutes each. Well, cross country is probably more like more like yeah, actually the ultimate time is five minutes and 42 seconds. So it's six under six minutes. Where most people, you know, you go to a baseball game, kids' baseball game, they're for couple hours, you go home. Yeah, but then you just care for the horse and everything. So and and then first day is just a vet check. That's all you do. Yeah, vet just comes and says, Yeah, you're qualified. Horses, horses sound, you're qualified to do this event. Yeah, so I do a lot of work uh well when I'm gone because uh there's just so much downtime for the dad. Right. Uh Caitlin always finds things to do. But but anyway, coming off of that, and then the week prior to that, uh, my son was in the Georgia amateur down at Sea Island, and I was his caddy. Uh so I sound fine. And I don't do get to do much work then because I'm exhausted. Yeah. Carrying a golf bag. Uh actually, I did the practice round this year with him, uh, and I actually had blisters on my feet, partially because I had new shoes for the event. But yeah, uh that I was exhausted. I I was I was thinking you guys wouldn't rec wouldn't recognize me when I came back. I was half the size, I feel like half the size I was when I showed up. Oh, yeah. Lost weight, got tanned. Yeah. Yeah. Didn't eat much. Yeah. It was too hot. You're just like, I don't want to eat anything. I'm I'm I'm I just want to drink tons of water. Yeah. Um, so anyway, it's been a it's been a good couple of uh weeks and I'm happy to be back in the office. Maybe someday I'll get my own vacation. Yeah. Do you think that would probably be nice? Yeah. The golf part's fun. Uh I'm but but um sitting sitting by a pool somewhere sounds pretty good too. I don't I don't I don't get to do that very often. Yeah. Just chilling. Uh all right. So yeah, I came back and like, who are all these people, man? We got four interns here. Yeah. Uh there was a total of um uh 16 employees. If you add the interns, we're at 20 head camp right now. So that's that's crazy.

SPEAKER_05 5:32

Yeah, it's crowded.

SPEAKER_03 5:33

Feels a little yeah, feels a little crowded. Yeah, used to used to have an extra space, some elbow room. Good grief. All right, we like having them here though. Yes, we do. Absolutely. Um, all right, let's get down to the podcast topic.

The First Rule Is Do Nothing

SPEAKER_03 5:47

Inheriting money. Uh, I I think that um this is this is always important. It's kind of funny what people think of is I I inherited a large sum of money. That happened to me a couple years ago. The lady just wanted to meet after five o'clock. She's like, I've heard a very large sum of money, and I've got to talk to somebody about this. And um I was like, Oh, okay. Well, no, everyone else wants to go home, but I'll stick around and and happy to talk with you and see how we can help you. Yeah. And uh it was ten thousand dollars. Yeah. Right. And I was trying to keep a straight face, like, wow, okay, so if this is a substantial amount of money, like what's going on in your personal life? Yeah, let's not focus on the inheritance, let's talk about you. Right. And of course, there was tons of debt and all kinds of stuff. So um, but uh certainly for our clients uh and their children, uh, a lot of them have what we consider a substantial amount of money. And in uh you ideally, ideally, you have your own financial plan in place and your parents did, and you have your own estate planning, and they have their own estate planning, and everything just just and everyone communicates and there's lots of transparency and organization. Yeah, everything just kind of flows through uh with a purpose. Yep. Um, and then we wake up to reality, and that's not obvious. That's all right. That's oh no, most people don't don't uh do things. We still have a generation of people that are secretive about their money, yeah. So you really don't know what's out there uh until until you're in charge of it all of a sudden. So um, all right, so why does all this matter, William?

SPEAKER_05 7:20

Well, obviously, like if there's an inheritance happening, typically that happens when somebody passes away, you know, for the most part. Um, so there's emotions involved, you know, all the human things involved, family things involved, um family dynamics if you're not an only child or you know, the only beneficiary. Um, so that sometimes creates, you know, different complications and dynamics and all that, right? Um, and then I mean, I I I just think even like with that ten thousand dollar example, it's like when you inherit what to you is a large sum of money, it creates a lot of anxiety and you want to make sure, you know, for most people, you want to make sure that you do the right thing with the money and you might just not be sure what to do with it. Yeah. Um, or what direction to go. You might have a general idea, but it's like, okay, what what's the best thing to do?

SPEAKER_03 8:12

Well, there's there's a there's different types of people and you can decide if it's good or bad as a listener or indifferent, I guess. Uh we have I've had clients sit in my office and say that they have some health issues, and it's not fair that the younger siblings are gonna be able to inherit money someday and and enjoy it where they may not get to enjoy it for as long and they want their share immediately while the parents are alive. Yeah. So you can you can process that. Then there's been other people who inherited assets and didn't touch them, just left them there. They cleaned up the estate where like I'm I I don't want to feel like that I that I'm uh grabbing for money. So they just left it there for years. Oh wow. Invested. Yeah. I mean, it was all part of their plan invested, but they were not gonna touch it because that's mama's money and we would never go after that. Three siblings, exact same concept. Yeah, and I think I think what kind of helped drive that is that they had seen other families fighting tooth and nail to get to it as fast as possible and already had it spent before parents passed away. And they were like, we are not that, we will leave this money here and it'll just grow and it'll be there for us way down the road. Yeah. So I mean, there's obviously there's nothing wrong with that. Right. There's probably a balance between those two stories, yeah. Some somewhere in there, right? Right. Um, but I I I think it's uh you know, you have to go, you take the assets and you really should just go back to uh your your own financial plan and accelerate it. Right. Is is typically what you do. But I would say don't confuse receiving money with the need to immediately make all these big financial decisions. Yeah. You can be a lot like the second family and pause, think through things. There's nothing's on fire. Yep. Get it things organized. You should have things collected and organized, or maybe even dispersed. That's fine. As if you're the executor of the estate, absolutely, you know, disperse assets, but you don't need to um hurry, hurry, hurry. I gotta get a hold of this money.

SPEAKER_05 10:25

Right. I gotta do something with it or whatever, or quit my job, or you know, uh start paying things off as one that people talk about, um, or you know, buying the you know, huge, you know, lake house on Lake Oconey or whatever. Right. Um, you know, so I mean, there's a lot of different things that you may think of when you think of even your situation, like what would you do if you were inheriting something? If you had a windfall, what would you do with that money?

SPEAKER_03 10:51

Um there's a few things you don't do. Yeah, we can talk about that.

Common Windfall Mistakes To Avoid

SPEAKER_03 10:55

I I I see people that they'll quit their job immediately. Yeah. Yeah. I had one lady do that who I was like, this is not a large, she wouldn't have retired.

SPEAKER_05 11:06

They'll schedule a meeting with you, but they've already made the decision. Yeah, exactly. Yeah, exactly.

SPEAKER_03 11:11

Yeah. I met the daughter because the mom passed away. She was a client and she she had quit her, she'd quit her job. I was like, You this isn't this is less than a million dollars. Like, yeah, to her, that was a lot of money. And she's well, I can just re I can retire now, right? And and I wanted to say no, but she'd already quit her job. Yeah. So we we we eventually said, Hey, you should consider going back to work. Um, this is why. Yeah, but we had to go through this. Is what uh this is this is how money works.

SPEAKER_05 11:40

This is how much you can live on, yeah.

SPEAKER_03 11:42

Yeah, right. Um paying off everything without a plan. So people get money and then immediately start just going to eliminate debt. That's typically my go-to is what how can we free up cash flow? Um, sometimes families like, well, I don't want my parents to pay for my credit card debt. I'm gonna pay for that myself, and this money will be separate. Uh, but sometimes we want to pay off houses and people will struggle with the same thing. Well, this is my parents' money. Uh what is it they wanted me to do with this money? And I'm like, well, they're providing you a house, right? Yeah. Yeah. So I think they would like that. Um, and also you're you're in just reinvesting in real estate. It's not like you went on a big trip and it's just gone.

SPEAKER_05 12:23

Right. Well, and it depends on again the the surrounding situation, too. Cause like if you have if you're doing everything that you should be doing and you have savings and you know, investments and all of that, then that's a great decision. But also the flip side is like if you're doing this, you know, just because it's your first thought, you might end up house poor. Yeah. So that's that's like the other side of that too. Exactly.

SPEAKER_03 12:43

Which is why you just, you know, you don't want to just do it immediately, right? Uh making large purchases. Um, this kind of fall, it's not one large purchase, it was many. I did not work with this person. Uh, this was a sibling of a client of ours. And when they inherited assets, uh, it was a large amount, um, I'd say a couple million dollars each. Um the sibling started taking big vacations, and they didn't just fly first class on Delta, they they um signed up for net jets. Oh man, yeah. It within uh, I think about three years, all the money had been spent. Yeah. So it took took the inheritance down to zero just through net jet netjet subscriptions and big home rentals uh that was not normal uh part of their lifestyle.

SPEAKER_05 13:31

Yeah, I just wear I feel like if you're the one leaving, you know, an inheritance, you want to make sure that you know your beneficiaries are not this isn't gonna be like a lottery effect where it's like, oh, I got this big windfall, and it's like you weren't expecting it or thinking about it, and you know, you haven't helped get them to the point where they're ready for that. Yes. So that's the flip side of that. I would say is you just need to make sure that you're having these conversations and you know what this is for.

SPEAKER_03 13:57

We're starting to do that as a firm now, right? Uh as as I see my my clients age, they've been with me here for 20 something years in some cases. Um, I'm offering to work with the children at at uh and not in some cases, uh discounting our our fee, our financial planning only. Because we a lot of times that we don't need to manage assets for the kids, but they just need a plan. Right. They don't even have like wills or power attorney and medical directives. Right. They're in they're not a good position to be inheriting assets. Exactly. Uh so that that's something we've been doing recently. And I've I've talked with Kate, uh, she's our director of marketing, uh, even about putting a program together uh for the children of clients where they feel welcomed into the firm. Uh because I feel like that's part of our job as advisors is to make sure that we're we're being good stewards into the next generation. Or if there's a problem, maybe we can identify it and say, hey, we we should make some changes here. Um not not back reporting back to the parents necessarily, but just and talking to the next generation. Right. Um investing all the funds at once. Sometimes I see that it's like they they they start it's like, oh, we're gonna buy you know individual stocks, or or the worst thing is uh the financial advisor for the person who passed away starts pushing annuities. Yeah. Because they they can get an annuity sale out of it. Yeah. So I see that sometimes. That's pretty sad.

SPEAKER_05 15:20

Five million dollar, you know, whole life cash flow, cash writer, all the yeah, all the things.

SPEAKER_03 15:25

Yeah, all the things that benefit the advisor, do absolutely nothing for the for the person, uh, person buying it, um, other than I guess giving them life insurance, which is which is which is probably they probably didn't need in our theoretical possible example. Um acting on advice from friends on social media. This is on our common mistake thing. Uh that that's happened here recently in our firm. Uh somebody was like, Well, I've gotten a you know X percent rate of return. It's half of what it's half of what um my friend is getting. And I started looking into it and it was a lower rate of return, but there was a very good reason for it. Half half their account was in cash. And it was in cash because there's a large purchase coming up. Right. And uh we we were not to invest that money because of this large purchase. Right. So really their rate of return is exactly what quote their friend had, which is probably over a whole year in our return, they'd only been here for like nine months. Right. So in the end, they actually were doing annualized, they were doing better than their friend. Right. Uh, and and when you have cash in your portfolio, that's gonna create a drag. But if the market had been down, they would have been they would have looked a lot better than their friend, right? Yeah, so it's it's um you have to be really careful about back of the cat uh napkin math and water cooler talk and no one's another example of that too.

SPEAKER_05 16:53

Like and I've had a uh client that used it actually really well and used it to make very like informed questions. So like they they knew what they didn't know, and they kind of use it that way. But there's there's a lot of people out there that I've even seen try to make like a whole financial plan and like a state plan scenario, and it I mean, it just doesn't understand your situation or your context, it's just basically just repeating what it sees. Um, so it's giving you general advice, but um, it's kind of that kind of similar to having a friend that you know maybe doesn't under understand the full picture.

SPEAKER_02 17:28

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SPEAKER_03 17:47

So let's say um you're the executor of an estate. So not

Executor Tasks For The First Month

SPEAKER_03 17:53

only are you inheriting money, you're now in charge of everyone else's. Right. Right. Yeah. So let's let's walk through uh real quickly like the first 30 days, what you what you should be doing as an executor.

SPEAKER_05 18:05

Yeah, I mean, definitely understand the estate. So what is being dispersed, what you're inheriting, or if there's multiple beneficiaries, what you're basically assisting them in in inheriting, um, what type of investments or assets they are. So, you know, cash, what you know, maybe IRAs, maybe brokerage accounts, maybe uh, you know, real estate assets, maybe annuities, like you mentioned earlier, maybe uh share of a business, maybe it's a private investment that spits out K1s, you know, there's a lot of different stuff that that you could be inheriting. Um, and obviously understanding where it is, how it's titled, how it's passing is all very important.

SPEAKER_03 18:43

Basically taking inventory is what it is.

SPEAKER_05 18:45

Yeah, exactly. Yeah. Um, you know, obviously, if they're depending on what's the structure of the estate is or really any structure of the estate, you want to understand the documents that are on file. So, you know, whether it's passing, you know, via will, um, obviously retirement accounts are passing outside of that, most likely, you know, um, depending on the beneficiary situation. Um, and then, you know, if it's a trust, you know, that's a different, different situation there as well. But just understanding what the estate structure actually is.

SPEAKER_03 19:15

Uh revocable. I mean trust documents, original, you need an original documents. You need to really hunt those down. Beneficiary forms, account statements, property records, tax records. These are all things that you should gather uh to create an inventory of where what the assets are. This is outside of you know personal property, obviously. Um, I I will say, flip this for a second. We're talking about the executor doing these things. You should set your executor up for success. Um, we keep seeing new clients that have, I'm not exaggerating, I think you had one recently. It was 50 different type accounts.

SPEAKER_05 19:50

Yeah. I was if it wasn't 50, it was close and it, yeah, it was pretty, pretty rough.

SPEAKER_03 19:56

There's just tons of brokerage accounts, none of them super large either. Just kind of, I mean, it was it was a large total. Yeah. Right. But but everyone, you should just have one Roth, you should have one IRA, you should have one brokerage account that's either titled in your revocable living trust or it's held jointly with your spouse and has a transfer on death, a TOD attached to it. Right. You should have one or two or one check-in account, one or two savings accounts, maybe high yield savings account, and maybe a smaller savings account that's attached to your checking, so you can move money at the last second. Yeah. So it's it's I just had to do this for my son recently. He called me up. He goes, I need $100. I said, You get an allowance, and I figured this day would come, right? Well, what happened was he uses he uses our Flight Path account. He saves into the investment account there. And we also had puts money into the savings account. Well, he's been working, so he's been putting all his money into his high yield savings because he gets a higher higher yield there. Right. But he didn't have enough money in his checking account or his bank savings account, and it's gonna take two days for it to transfer back over. And he needed gas. Yeah. I was like, all right, well, again, this is you know, a barely working young man, right? So I said you need to have you treat $100 as your minimum in your checking account. You need to have $500 as your minimum uh in your savings account, and then put the rest of your savings in your high yield. Yeah. And then and then I had to learn that lesson too.

SPEAKER_05 21:23

I had I've had one or two like times where I overdrafted. Thankfully, I had savings at the same bank. So yeah, I covered it from that, but it was still like a you know, kind of a scary moment, but you know, but but yeah, but this learned that.

SPEAKER_03 21:34

But this is this is all uh people need. You don't need to have multiple checking accounts. I mean, I I I run I have uh multiple LLCs and they all live at one bank, right? I why I would never collect bank accounts. I I just of course I'm also OCD on order, everything has to be very orderly in life and very orderly within my business, and so I I'm more apt to checklist. And it's very clean. Sometimes, sometimes things happen, and I'm like, you know, this SpaceX uh IPO looks pretty good, but um I didn't do it. You know why I didn't do it? Because I'd have to open up a separate page. I'd have to open up a separate account. Yeah. I was like, well, Betterment doesn't take or this flight path doesn't take individual stocks. I'd have to, it's like, ah, it's gonna end up in the index fund eventually. Everybody's gonna win.

SPEAKER_05 22:27

Yeah. You'll miss out on the crazy volatility that's probably gonna happen over the next year.

SPEAKER_03 22:32

Keep things very tight and organized. Uh, you don't you don't need to diversify your brokerage accounts. Some people think that. You gotta diversify your you gotta have, well, if one goes out of business, I have access to all these others. Charles Schwab, Fidelity, these people, these people are right.

SPEAKER_05 22:49

They've got SIPC insurance and Lloyds of London insurance on top of that.

SPEAKER_03 22:53

I doubt any of our listeners are gonna exceed the S P I C plus the Lloyd's insurance that they purchased on their accounts. Yeah. Uh so if they go to business, you're not, I'm not worried about that. Um, if you're worried about like the um apocalypse happening or something, then that's like gold buried in your backyard. It has nothing to do with any of this, right? Storable food or whatever. Right, exactly. So just keep things neat and tight because you know, if you if you have to go, if you have to go um be the executor in someone's account and they have 12 checking accounts and they've got 10 brokerage accounts, that's that much more paperwork that you have to contend with. Uh so there's just no rhyme or reason to it. Uh some people say, well, if I do this, I get a higher yield over here. I don't know. I again, how much yield are you, how much extra income are you really getting on a tenth of a percent or a quarter of a percent, really?

SPEAKER_05 23:44

Yeah, it depends on the client. But yeah, I and yeah, there's times where it may make sense, but but for most people, it's like this might be like, you know, ten dollars difference in a year, fifty dollars difference in a year. Exactly.

SPEAKER_03 23:55

You know, it just depends. So going back into um the topic, I I again um you want to write everything down on a spreadsheet and start collecting paperwork. You may have to call um to call the companies and say I need a beneficiary form or a um transfer form. Um you do you you need your um death certificate ready to go to these different organizations. Uh but prep prep the paperwork. Don't don't rush getting things out, especially you have to go through the probate process, uh, just because you have a could have a creditor on the other end that's that's wanting money. Yeah. Um, so you you need to um collect all these things.

Probate Trusts And Inheritance Taxes

SPEAKER_03 24:32

I I think one thing that we will say that um tax-wise, I and I get this a lot, and it's a fair question. Um, but you don't how much inheritance tax are you going to owe? So let's be really clear that each uh spouse gets a $15 million plus exemption right now. So you have to be 30 plus federally 30 plus million dollars uh before you owe any death tax to the federal government. Yep. Now, if you live in the south, there there's really not any um death tax on the southern states. Right. Uh if you're north of us, Newark, New Jersey, yeah.

SPEAKER_05 25:16

At list of you is Pennsylvania, Kentucky, actually, which has kind of surprised me. But yeah, there's a couple um where they have inheritance taxes.

SPEAKER_03 25:24

So you should move. Definitely need to think through that one. Yeah. But but yes, there could be um state tax owed there. So you you might need to. I didn't realize Kentucky was on that one.

SPEAKER_05 25:34

I didn't either interest until I researched it. And some of the, I mean, obviously it's different for each state, but some of their exemption levels are uh whatever they call it, it might not always be called exemption. They're actually a lot lower than the federal one. Oh, yes, and so that's another thing. Like three million in some cases. Yeah, yeah, or seven, I think for New York or something like that. So um definitely something to pay attention to.

SPEAKER_03 25:55

And then if you have, if you have uh the chance, if you if you have the chance to make a change before someone passes away, if they live in Florida, California, Nevada, Texas, you really want um to have uh your assets titled in a revocable living trust. Right. Uh I'm doing I'm helping with a probate case now in Florida, and the attorney gets uh three percent of whatever the value is that goes to probate.

SPEAKER_05 26:19

Yeah.

SPEAKER_03 26:20

Uh and so that's that's kind of a kind of a big number. Yeah. Um, so you could you could save you the the estate three percent by creating a revocable living trust. In this particular case, um the revocable living trust would have been way cheaper than what they're gonna pay the attorney. Yep. We know we have could have state tax. If you're in Georgia, you don't have that. Um you know that the federal number is very high. Uh when you pass away, um, let's talk about inherited brokerage accounts.

Step Up Basis And IRA Rules

SPEAKER_03 26:48

You anything you have in that birth time is going to step up in basis.

SPEAKER_05 26:52

Yeah. And we have a lot of great videos that explain this too. So you can go back without having to listen to the whole podcast. But basically it's, you know, what you paid for. So say you you bought the stock, I'm gonna use stocks as an example. You buy it for a thousand, it grows to two thousand in total value. So that means that your gain is one thousand. So that's what the portion that you pay tax on, you're not paying tax on your the basis that you basically purchased that investment for. Um, but in an inheritance situation, you're getting a step up in cost basis, which means if whoever the decedent is the technical term, the person that passed away, if they purchase the stock for a thousand, but it's valued at two thousand when they pass away, then it gets the basis gets stepped up to two thousand. So you as the beneficiary, you're not gonna pay tax if you sell that holding as long as it's around two thousand, right? Or you know, at or below two thousand. So um that's an important thing. And that's honestly a very powerful thing. So uh that's a good reason to pass taxable assets to your beneficiaries if you have that um uh you know option available to you. Yes. Um any type of capital asset is uh included under that.

SPEAKER_03 28:03

Now your IRAs are done a little differently, right?

SPEAKER_05 28:05

So those still are subject to um ordinary income tax, not the ROFs, just the right, correct, just the traditional IRAs, and then um if that decedent had started RMDs, that means that you're gonna have to take money out every year under that schedule, and then um you have to withdraw for non-spouse um um beneficiaries, meaning you know, any basically anybody else, um you're gonna have to withdraw that within 10 years of that um person's date of death. Yep. Um, so you know, that's another thing that for some clients that have large traditional IRAs and say you're in a higher tax bracket, that could be, you know, slightly uh maybe problematic is the wrong way to put it, but it is something you want to take note of and be aware of for sure. Um, and it's something that, you know, if you have an advisor that you can kind of help plan around and decide how to handle that.

SPEAKER_03 28:57

Life insurance proceeds are typically tax-free. Um, real estate, we just talked about that. Also add annuities. If they have annuities and you're inheriting annuity, I'm sorry. Uh unfortunately, annuities are taxed at regular income. Yeah. Uh the gains. Yep. So that they'll try to get you to roll that into another annuity. You don't want to do that. Um, but annuities uh again benefit the person selling it and the company. Uh it's not a good vehicle for inheritance, which which is funny because they they sell them as this is great for taxes because the news defer the tax. Well, they defer it into the next generation, is all that's all they do. You pay less tax, yes, but then the next generation has to pay a lot of tax. Yeah. Yeah, and I will say that tax uh tax uh advice is very specific to the individual person. Every family is gonna be a little bit different. So you want to sit down with your financial advisor to understand the tax consequences of um inheriting assets. Yes, it it may it may vary depending on um uh what it is that you're inheriting, what asset you're inheriting.

SPEAKER_05 29:59

Yeah, what type of asset, right?

SPEAKER_03 30:01

Yeah, yeah. The big decisions that you want to make before investing anything is really uh I go back to looking at your own financial plan. Yeah. Um, I think you know, there's an emotional side to this of what do you want to spend the money on? Um oh one thing I'll add, uh I get this on not from the people inheriting assets, but the people who know their assets will be inherited someday. Right.

Keeping Inheritance Separate In Marriage

SPEAKER_03 30:27

They say, Well, I I what if my kids get divorced? And I want, you know, how do I make sure this money goes along with the kids? And there's there's a couple of things. One is um the law is really set up that assets follow the bloodline. So if if I inherited assets from a family member, um, I would keep those assets in my own name and not jointly held. Commingle, yeah, don't not commingle an inherited asset with your marital assets. If you keep it in your own name and there were uh to be a divorce down the road, you can clearly show the the paper trail of this came from mom and this is mine and it's separate from our marital assets. Right. And that'll last forever. There's no timeline on that. You don't need a prenup or post-nup or anything like that to cover inherited assets. But as soon as you throw that into your joint check-in account or a joint brokerage account, or you add a person to it, then it becomes marital assets. May not be that big a deal to you, uh, but it is something to to think about that that's that's how you keep them, that's how you keep it all separate.

SPEAKER_05 31:31

Right. Yeah. And if you're on the uh, I guess the pre-inheritance side of things, um, you know, leaving things in trust is another way that you can set that up. Yep. Um, just as a note. But I know we've got other podcasts on that, so I won't go into detail there, but that is another option.

SPEAKER_03 31:49

Yeah. And then otherwise, I would say what you know, beyond the emotional part of this is mom's money or dad's money, and this is what I want to do with it. Uh, if you just go back and apply it to your overall financial plan, now as you apply it, you it this is uh you're you're bringing it into the marriage at this at this point. So it's no longer protected. But uh, but that's fine. Hopefully everyone has a solid marriage and not worried

A Simple Order For Using Money

SPEAKER_03 32:13

about it. Um but the f the first thing I I go back to the kind of what I call the rules of financial planning. Number one is do you have any stupid debt? Yeah. And it sucks to have to use inheritance to pay off Amex and Visa credit cards at 30% interest, but that's probably the best thing to do uh and make sure you don't get yourself in that position ever again.

SPEAKER_05 32:33

Right. Yeah, that's the biggest part, right? Because if you pay it off and then you're there five years from now again, then you didn't really accomplish anything.

SPEAKER_03 32:41

And second part is do you need to use this inheritance as to create an emergency reserve for yourself that that you work hard never to touch? Um, the next thing would be should this inheritance be here to supplement my retirement? So you put you put that money into your into a brokerage account and say, This is this is gonna supplement my retirement, I'm gonna pull income off of this uh supplement or to accelerate my retirement or make my retirement that much better. Right. Uh and then and that option uh typically will um leave money to the next generation too. Because you're not spending down that entire account, you're just using part of it. Right. Uh I'll back up one second, talk about debt. It could be that paying off your house is important because that frees up cash flow. Right. And again, houses are typically inherited to the next generation, so you're still protecting the asset there. Yep. Uh and then after we pay off um or after we've either decided uh decided to pay off a house and or supplement retirement, then the next we'll just call opportunity money. You know, are there other opportunities that you can do with these funds? Maybe it stays in an invested brokerage account, maybe you invest in a second home or third home or or um and pay off a second or third home or something along those lines. Yeah. But these are all things that that are part of your financial plan to think about. Maybe you top off education accounts for um for for grandchildren or uh children, depending on when parents passed away, right?

SPEAKER_05 34:06

Yeah, but that you're to your point, that does go back to what are the original goals of the plan. And maybe there's some things that we had as, you know, maybe third tier three things that we hadn't gotten to yet that then you can apply that to. So maybe for some people that is like education accounts or it's the vacation home, like you said. Yeah. Um, or just diversifying, maybe you have a large stock portfolio, you have a huge amount there, so you want to buy a rental house. You know, I mean, some people don't want to do that, right? But right if that's what you want to do, that's that's an option.

Legacy Giving While You’re Alive

SPEAKER_03 34:36

So and then if if if you're not if you're listening to this and you're not settling or an inheritance or anything, but you're some you're simply uh thinking about this for yourself, maybe maybe you do some things to help the family now while you're alive and get to see the hopefully the thank yous and and and the benefits of the blessings of of what you did. I've had several conversations with clients about that recently. I said, Yeah, why don't you why don't you um top off they have great grandchildren? So why don't you top off like a 529 plan so we know that they can go to uh just about any school they're choosing. Right, right. Or what if you what if you um paid for a really big vacation? It's hard to do everyone's so busy these days, but what if you paid for a one two-week, one-week big family vacation, something that some people will remember, you know, it's part of leak leaving a legacy, right? You know, that you did something. Um if you have an only child, um why why not start moving as much as you can in assets over each year, not just to supplement their lifestyle, but maybe it's to pay down their mortgage or um cover their children's right, or if you have an estate tax potential thing issue.

SPEAKER_05 35:46

Well, that's a whole different issue, right? But that's that's where you can start gifting there too.

SPEAKER_03 35:50

I have uh we have one client that has a um created a uh revocable, uh irrevocable trust. And so he moves over the maximum $19,000 every year into this trust per grandchild. And the trust is set up to benefit the grandchildren in the future. And he named it after himself because he's like 30 years from now, no one's gonna know who I am, but they're gonna the my family's gonna know who I am because they're gonna be pulling money out of this trust in 30 years. Yeah. Yeah. So it's it's uh just thinking beyond uh where you're what your current situation is, thinking bigger. Uh and I think that's what we're good at uh as a firm is helping people uh think about the the the future and what their options are and how how do you leave a legacy?

SPEAKER_05 36:30

Yeah, I heard I actually had a client who explained it as giving with a warm hand instead of a cold one. I was like, oh, that's that's yeah, that sums that up. So absolutely.

SPEAKER_03 36:39

All right. Uh thank you, William, for uh putting this together. Uh I guess um you have any final thoughts?

Build Your Team And Final Advice

SPEAKER_05 36:45

No, I think um assembling your team is really important. So if you're in a situation where you don't have a financial plan, but you have this you know large windfall coming your way, then uh assembling a team is probably the most important thing you can do. Obviously, after pausing and not making any big decisions right away, I would say those two things are probably the main keys to this.

SPEAKER_03 37:06

I agree. All right, thanks for listening to today's episode. If you're interested in learning more about Wiser Wealth Management or want to schedule a consultation to meet with one of our fiduciary financial advisors, you can do so by going to wiserinvestor.com or you can click in the link in the episode notes. See you next week.

SPEAKER_00 37:22

Thanks for listening to a Wiser Retirement Podcast. We hope you enjoyed today's episode. Make sure to subscribe wherever you're listening. That way you don't miss any new episodes. We'd also appreciate if you could leave a rating and review. If you have any questions about anything that was discussed today, head to wiserinvestor.com and reach out. This podcast is strictly for informational purposes only and is not to be considered as investment advice or solicitation to buy or sell any financial products, securities, digital assets, or any other investment vehicles or a basis to make any financial decisions. Wiser Wealth Management Incorporated is a registered investor advisor with the SEC. The host and or guest may personally own securities, digital assets, or other investment vehicles mentioned on this podcast. Neither the host nor guest of the show are compensated for their participation, and no referral fees are paid to or received by any host or guest for clients, listeners, or similar interests. Investments involve risk, and unless otherwise stated are not guaranteed, feature to first consult with a qualified financial advisor, tax professional, insurance professional, andor legal professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.