Inheritance: What Should You Expect?

Receiving an inheritance is life changing no matter how big or small. Transferring assets to beneficiaries and/or heirs can get complicated. Since the process isn’t as easy as depositing a check, learn what to expect when you receive an inheritance.

What Is Inheritance

Inheritance is a financial term that refers to assets being transferred to certain individuals in the event of a loved one passing. These assets can be:

  • Cash
  • Property
  • Stocks/Bonds/Investments
  • Art
  • Jewelry
  • Books
  • Antiques
  • Vehicles
  • And more

The passed loved one can name beneficiaries to inherit these assets. If they don’t, their assets will automatically be passed to the heirs of their estate, which includes their spouse and any children. Whoever receives an inheritance may be subject to a long legal process called the probate process and taxes.

The Probate Process

The probate process is the legal process of authenticating an estate and dividing the deceased’s assets. If there is a will, a probate court will review it and assign an executor. The executor is in charge of dividing assets among the people named in a valid will. Any disputes are resolved through the court.

If a loved one passes without a will or an invalid will, their estate is divided according to state laws by an administrator. Without a valid will, some assets run the risk of being delivered to beneficiaries who the loved one did not want to receive.

Either way, this process can get muddled due to potential claims that occur or relational disputes. Having a will makes things more clear cut and helps the court and executor maintain the loved one’s wishes.

Beneficiaries vs. Heirs

Who receives an inheritance is up to the loved one. They can name beneficiaries in their will and ensure they get specific assets. When certain individuals are named, it can be whoever the loved one determines, including relatives like aunts, uncles, and cousins or friends.

An heir is someone who is entitled to the loved one’s estate, determined by the state. This usually only includes children and a surviving spouse. This distinction only comes into play if there is no will to follow.

Taxes

While there are no federal inheritance taxes, some states do impose one. As of August 2024, these states are:

  • Iowa
  • Kentucky
  • Maryland
  • Nebraska
  • New Jersey
  • Pennsylvania

So, if you receive an inheritance in one of these states, the amount you net may be less due to taxes. There are some exceptions that may apply but otherwise the amount you will be taxed is determined by your relationship with the loved one and how much you receive.

To avoid as many taxes as possible, you can either encourage your loved one to place your inheritance in a trust or take out a life insurance policy that names your heirs as beneficiaries. These types of payouts are not subject to taxes.

How To Manage Your Inheritance

Whether it’s a small sum or a large windfall, any inheritance is money/assets you were not expecting. Getting a sudden influx of cash can be overwhelming. Before making any brash decisions, first, take a breath and evaluate your new financial situation. Here are some basic steps to help:

  1. Make a list of your current debt, income, and your assets. This will help you understand your financial situation and see the big picture.
  2. Create a financial plan, including short-term and long-term goals. Consider retirement, education, becoming debt-free, etc. A financial advisor can guide you based on your unique circumstances and make sure you make the most informed decisions.
  3. Consider new avenues like investing and giving to charity. If your finances have always seemed too thin to act on, an inheritance can help put you in a better financial standing and open new doors.
  4. Plan your own estate. With your newfound inheritance, you have more to protect for your loved ones. Having your own estate plan will create essential documentation like a will to ensure that in the case of your passing your own assets are divided how you wish.

Inheritance can come out of nowhere but when you know what to expect, the process can become easier for you and your family.