As an estate planning attorney, I often find myself providing legal counsel and advice to clients who recently inherited money or other assets. Receiving an inheritance can provide financial security or allow you to achieve long-term goals, but it can also be problematic in the hands of a beneficiary who doesn’t know how to properly handle the sudden windfall. To help prevent you from making them, let me explain some common mistakes people make after receiving an inheritance.
Failing to Rely on Professionals
One of the most common – and most costly – mistakes you can make when receiving an inheritance is failing to seek professional guidance. Inheriting assets often involves navigating complex tax laws, understanding investment options, and making estate planning updates. Trying to handle everything on your own may result in missed opportunities or mistakes that could have been avoided with expert help. Whether it is a tax advisor, financial planner, or estate planning attorney, professionals can provide valuable insight and help you make informed decisions.
Failing to Understand the Tax Implications
While federal gift and estate taxes should be paid by the estate before an inheritance is passed down to the beneficiaries, some states impose inheritance taxes on the beneficiaries. These taxes can significantly reduce the amount of money you ultimately receive. In Maryland, the tax can be 10%. Additionally, some inherited assets, such as IRAs or other retirement accounts, may be subject to income tax when withdrawn. Consulting with a tax professional can help you understand the tax consequences of your inheritance and avoid penalties or unexpected tax bills.
Ignoring the Importance of Estate Planning
Once you receive an inheritance, it is crucial to revisit or create your own estate plan because failing to incorporate the inherited assets into your estate plan can lead to complications later. For example, your inheritance may increase the size of your estate, potentially making estate taxes or probate issues more relevant to your situation. If you do not already have an estate plan in place, now is the perfect time to work with an estate planning attorney to ensure that your assets are distributed according to your wishes.
Making Rash Financial Decisions
Inheriting money or assets can create an immediate temptation to spend money; however, making large purchases or impulsive financial decisions is almost always a mistake. Before you make any financial moves, take the time to develop a plan, considering your long-term financial goals, such as saving for retirement, paying off debt, or investing for future growth. A financial advisor can help you create a strategy that makes the most of your inheritance.
Not Considering the Needs of Other Beneficiaries
If you have inherited assets that are shared with other beneficiaries, such as a family home or business, neglecting the needs and wishes of your fellow beneficiaries can lead to disputes. It is important to communicate openly with other beneficiaries and work together to reach mutually agreeable decisions. For example, if you have inherited a family home with siblings, you will need to decide whether to sell the property, rent it out, or keep it for personal use. Misunderstandings or disagreements about how to handle jointly inherited assets can lead to long-lasting family rifts, which is why clear communication is essential.
Failing to Diversify Investments
It is important to review and diversify your portfolio and avoid holding onto inherited investments without considering whether they align with your risk tolerance or financial goals. For example, you may inherit a concentrated stock portfolio from a family member, but holding too much of one asset can expose you to significant risk. Diversifying your investments can help reduce risk and increase the potential for growth over time.
Disregarding Emotional Factors
An inheritance often comes from the passing of a loved one, which means emotional factors can play a significant role in how you handle it. Some people make financial decisions based on sentimental attachments rather than sound financial reasoning. For instance, you may feel emotionally tied to a family home, even though maintaining it is not financially practical. On the other hand, some individuals may rush into decisions to move on from their loss. It is important to take the time to grieve and process your emotions before making significant financial decisions.
Can We Help You Avoid Making Mistakes with Your Inheritance?
For more information, please contact our estate planning office in Owings Mills, Maryland by calling 410-654-3850 to schedule an appointment.
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