So, you’ve come into some inheritance money. Perhaps a grandparent, parent or long-lost uncle remembered you in their will. Before you earmark the unexpected windfall, be sure you do your homework.
Let’s dive into a little inheritance 101.
First, what is an inheritance?
In short, it’s the practice of passing on property, titles, debts, rights and money upon the death of an individual. In general, an inheritance in and of itself is not considered income, so you won't have to report your inheritance on your state or federal income tax return. However, the property that you inherit may have built-in income tax consequences, so plan accordingly.
How will you be receiving the inheritance?
Many people create specific instructions within their trusts or wills around how they would like the funds distributed. You might receive all funds at one time, or some people elect to disburse funds over several years via an installment plan. Sometimes distributions are made based upon a beneficiary’s age, or after they have reached certain milestones – like graduating from college or getting married. Understand the terms, and then you’ll have a better sense of your inheritance timeline and rules.
Take a moment to evaluate your financial situation.
If you discover the cash is coming your way now, don't rush to use every penny of the money right away. It’s fine to drop the inheritance check into a federally insured credit union or bank account and take a moment to assess your current financial situation.
Do you have outstanding debt? What kind of debt do you have? Do you have an emergency fund? Are you stashing enough money away for retirement? Do you have school-aged children who could benefit from a college savings account? Consider meeting with a financial planner to help you review your financial strengths and weaknesses. Take some time to reflect on the gift of inheritance and see where it can benefit you most.
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