Posted by Elliot Kravitz, ATP

Smart ways to Maximize your Inheritance

Smart ways to Maximize your Inheritance

When you receive an inheritance, regardless of the amount, you need to understand how to get the most out of it. Depending on who left you the inheritance, you may have different emotions and ideas about this decision. Here are some common questions and scenarios you might face with inheritance and the best ways to deal with it in the future as well as maximizing your inheritance:

Consult A Financial or Tax Professional

Depending on the type of inheritance, for example, investments, life insurance, retirement account, significant federal and state taxes on the estate can be managed. Working with a financial advisor or tax specialist can help you plan the sale of any property and mitigate the tax consequences.

    •    If the inheritance comes from a spouse, no tax may be due.

    •    Life insurance income is generally non-taxable.

    •    Non-pension assets pay taxes when sold and usually receive an "increase" in the base price. This means that any capital gains tax due will be based on the fair market value of the assets at the period of the beneficiary's death.

If you inherit an IRA, a traditional workplace retirement account, or an annuity, you will have to pay distribution taxes. Be very careful when you take your distributions. For example, if you withdraw the IRA from your uncle's account and transfer the money to your own IRA, the total amount of the transfer will be subject to a provincial income tax. It should also be mentioned that for spouses, it is necessary to renew the pension account of the deceased spouse.

Deposit Your Money

Before you make any significant plans or purchases, stop. Deposit your inheritance or your investments in a brokerage or bank account. If you are married, you may need to determine if you are accessing the account only on your behalf or with your spouse. Keep in mind that inheritances are treated as separate properties in the event of a divorce. However, once these assets are mixed in a standard account, they lose this protection.

Reduce / Eliminate Debts

Your inheritance can allow you to repay your debt, including your mortgage. But first consider paying these loans with higher interest rates, such as credit cards, personal loans, and car loans. So consider paying off the mortgage. 

Think about the other goals

Identifying financial goals can help you determine the types of investments you need to make or different types of accounts to open. These objectives may include:

    •    Contributing to charity

    •    Establishing a trust or foundation

    •    Paying for the education of a family member. 

    •    You are helping your loved ones.

    •    Funding your retirement savings

Analyze Your Insurance and Wealth Planning Needs

If you have inherited a large amount, it may be prudent to increase the liability limits in your car and the owner's policies. If you have inherited jewelry, art, or real estate, you may need to increase coverage for your property and accident.

Consider a general policy. Does the inheritance inflate the size of the property so that it is subject to property taxes? Are you considering building a relationship of trust to support your family or your charity?

Do something good for yourself

Reserve a small percentage (no more than 5% - 10%) of your inheritance for a splurge. Take a trip. Go on holiday. Buy a new car.

Make sure to keep it small. After all, inheritances don't grow on trees.

Note: When it comes to inheritance and property maximization, talking to a professional is the best thing to do, as they can help you decide what is right at that moment, and also help you avoid paying fines and hefty taxes in the nearest future.

Elliot Kravitz, ATP
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