Issue 40.10
Of all the money that may pass through your hands during your lifetime, none is more emotion-laden than an inheritance. After all, you got it because somebody died. If the inheritance was unexpected, or large compared to your lifestyle, before you spend it, evaluate your situation:
1. Figure out exactly what you have and what you’re owed.
Typically, you don’t just receive a check from the administrator of the estate; you get bits and pieces of different investments. Usually, you get a “stepped-up basis,” meaning that the cost-basis of the assets are determined as of the date of death. So even if your father bought stock in IBM when it was $5 a share, if it was worth $125 a share when he died (and after multiple stock splits), your cost basis is $125. If you sell the stock at $130 a share, your capital gain is only $5. You also won’t necessarily get all of the assets at the same time. Getting bits and pieces of your inheritance at different times is confusing, and it makes figuring out what you have all the more difficult. But you must know how much your inheritance is, how it is invested and what the cost basis is to make good decisions.
2. Make a list of your short-term and long-term goals.
Assign dollar amounts to each goal and then compare your inheritance with how much you’ll need to meet your goals. When you inherit money, it is very tempting to spend it on short-term goals such as remodeling the kitchen or buying a new car. However, many of us are going to have difficulty meeting our long-term goals such as retirement and education for our children, and an inheritance may be the only way we can achieve them. Write down those long-term goals next to the short-term ones.
3. Decide how much you’re going to splurge.
If you know that you can meet your long-term goals, you can set aside money for short term goals, like that new car. Set up a separate bank account for this money, and when it’s gone, that’s it — no dipping into the rest of the inheritance.
4. Set aside three to six months’ worth of your regular expenses in an emergency fund.
If you don’t already have an emergency fund, this is important. Emergency fund money could be put in a short-term, fixed-income investment such as a money-market account.
5. Establish an investment strategy for your long-term goals.
The rest of your inheritance is your long-term goal money and, if you’re fortunate, it will go a long way to make up much of any shortfall you would otherwise have.
6. Set up your own Estate Plan
If you do not already have one, set up your own estate plan. This is crucial to ensure that your heirs receive their inheritance without having it diminished by unnecessary expenses, taxes and delays. A good estate planning attorney can help to answer questions about all of the above, and give good solid advice on the best way to pass your assets to others, given your individual set of circumstances.
Jeffery J. McKenna is a local attorney licensed in three states and serving clients in Utah, Nevada, and Arizona. He is a partner at the law firm of Barney, McKenna and Olmstead, with offices in St. George and Mesquite. He is a founding member of the Southern Utah Estate Planning Council. If you have questions or topics that you would like addressed in this column please email him at jmckenna@barney-mckenna.com