Receiving an Inheritance?

A Few Key Considerations

By Financial Advisor Carrie McDonnell

Over the next 20 years, baby boomers and the silent generation (preceding boomers) are expected to bequeath an estimated $76.2 trillion in assets to their heirs. The Bank Administration Institute says it will “end up as the greatest transfer of wealth in history.” Real estate, cash, securities, life insurance policy proceeds, tangible personal property and other assets will be passed along as part of this epic transfer.¹

While there is much to be said about how benefactors can best and most efficiently transfer wealth to the next generation, beneficiaries also have a good deal of complexities to navigate on the receiving end. As a starting point, beneficiaries should consider a few key points:

1. If you inherit securities, such as stocks, bonds or mutual funds, find out more about these investments. Maybe you were fortunate to inherit a tech stock that is rallying as AI ramps up. Or maybe you inherited overpriced Class A shares with a front load fee of 5.75% and an expense ratio of 1.25%. Just because your grandfather purchased the security twenty years ago does not mean it is a good investment for you.
2. If you inherit securities in a taxable account or property, make sure the cost basis is “stepped up”. Stepped-up basis is a tax law that applies to estate transfers. When someone inherits investment assets, the IRS resets the asset's original cost basis (or purchase price) to its value at the date of the decedent's death. If the heir decides to sell the asset, the capital gains tax is based on the new stepped up cost basis, often resulting in a significant tax savings for the heir.²
3. If you inherit a retirement account (IRA, 401(k), etc.) talk to a financial advisor. While retirement assets are tax advantaged for the original account holder, the beneficiaries of these types of accounts are subject to a different, and spectacularly confusing, set of IRS rules. In most cases, the government will require mandatory withdrawals of a certain amount based on your relationship to the decedent, the decedent's age at death and other factors.³

Lastly, consider how this inheritance fits into your larger financial plan. Though unwinding an estate can be challenging, it’s important to remember inherited assets are not meant to be a burden, but a gift - a gift that could provide financial freedom and security down the road.

1. finance.yahoo.com. “The Great Wealth Transfer: How Baby Boomers Are Passing on Fortunes to Heirs.” Andrew Lisa. 30 Oct 2023.
2. smartasset.com. “All About the Stepped-Up Basis Loophole.” Eric Reed. 30 July 2023.
3. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary