Gabriel Katzner - December 28, 2022 - Estate Planning
Key with inscription reading inherited property on top of documents

Inheriting money or property brings mixed emotions. You may be experiencing a significant loss, but you are also receiving a gift.

The question is: is it a gift that you want? Your inheritance may provide new opportunities that lead to a better life, but it can also present unintended logistical or financial difficulties that you are unable or unwilling to accept.

You may want to accept your inheritance out of respect for the person who named you in their will or as a beneficiary of an account or policy, but should you?

Before accepting or rejecting an inheritance, it is a good idea to seek legal and tax advice about the implications of your decision.

An inheritance can be life-changing. No law requires you to accept an inheritance, but frequently there are benefits to doing so.

However, if you choose to decline an inheritance, that does not necessarily mean it will end up in the hands of the state.

How estate planning usually happens in families

Most families with an estate plan ensure it contains instructions for distributing money and property. Some families will even discuss these plans at length when deciding who will inherit a piece of property or an account.

They may even ask each child to name things that they personally value so they can be specifically added to the last will and testament.

Many parents, as testators (people who have made a will or created an estate plan) or trustmakers (people who have created and funded a trust), divide their money and property equally among their heirs.

Sometimes one child may receive a larger share because of extenuating circumstances. For example, one child may need more caregiving or may have devoted more of their time toward the family in some way.

Typically, in this case, the family has discussed it in advance, so no one is surprised, and the unequal distribution does not cause resentment and conflict among the heirs.

How estate planning can happen in families

Unexpected inheritance can occur. A will or trust can be changed at any point. Testators and trustmakers are under no legal obligation to be fair. Family dynamics can shift, and life circumstances may change.

This can make an equal division of property and assets in one situation seem unequal in another. Trustmakers and testators are free to divide their assets any way they want.

Some examples of situations that may lead to changes in a will or trust include:

  1. When a child’s in a rocky marriage that might end with the ex-spouse receiving the inheritance
  2. The death of an heir requires that the assets be reassigned
  3. A childless friend or family member unexpectedly names a child as their beneficiary

Heirs usually have some idea that they are receiving an inheritance, but changes in estate planning can lead to some unexpected surprises.

Should you accept an inheritance?

If you have learned that you are the intended recipient of an inheritance, here are some factors to consider.

  • Does your inheritance come with debt? If you accept the inheritance, you could either sell the home to pay off the mortgage and keep the remaining funds or assume the mortgage and make payments. If multiple people inherit the home or other mortgaged property, the group will need to come to an agreement about whether to keep or sell the property. You will also need to consider insurance, taxes, and other payments needed to maintain the property.
  • Is your inheritance oversized? You could inherit a car, truck, RV, or another large item that is paid off in full but for which you have no place to store it. If you live in an apartment or condo or have restricted parking, you may have to pay for storage to house your inheritance. This additional cost may not be worth it if you are not sure you want the inheritance.
  • Accepting the inheritance presents logistical challenges. Your inheritance may be located across the country. The cost of hauling it back to your property or shipping it may be prohibitive. The money to get it to you may be included in your inheritance or not.
  • Your inheritance may come with tax consequences. Whether your inheritance is subject to taxes depends on your relationship with the person who named you as beneficiary and the state where you live. As of 2021, six states collect an inheritance tax: Nebraska, New Jersey, Pennsylvania, Kentucky, Maryland, and Iowa. Of these, Nebraska is the highest at 18%, and Maryland is the lowest at 10%. In addition to inheritance taxes, if you inherit income-producing assets such as real estate, securities, and retirement accounts, they may increase your taxable income and place you in a higher tax bracket. Talk to your financial advisors and learn what the tax implications of your inheritance might be and how it will affect your financial situation.
  • You may not want the inheritance. Sometimes you inherit something you don’t really want or know someone else wants more. Inheritances can cause hurt feelings, and sometimes it’s better just to refuse the inheritance to keep the peace. Just be aware that just because you have refused the inheritance, you will not have any say in who will ultimately receive it. If a contingent beneficiary was not named, then your inheritance will pass back to the estate and be given to the next beneficiary according to state law. Another option is to accept the inheritance and then gift it to your chosen beneficiary, but this option may come with tax consequences.

Whether you accept or reject an inheritance, prepare documents that clarify your intentions. Meet with your estate attorney to discuss the implications of accepting or rejecting the inheritance, assessing your current finances, preserving your wealth, planning for your future, and establishing your estate plan.

You can schedule a call with us or reach us directly at 855.631.3457 to learn more about how best to plan today to protect those most important to you.

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