Inheriting wealth is a double-edged sword; on one hand, it can be a life-changing event, but on the other hand, it comes with its own set of complex challenges, not the least of which is the potential for substantial tax liabilities. The shift from heir to millionaire can happen quickly and be a difficult transition filled with emotional and financial stress. 

You may be dealing with a financial advisor who manages your benefactor’s accounts and is well-acquainted with the estate’s assets but not necessarily your financial circumstances or goals. If this is the case, you should conduct your due diligence on this advisor to determine if they are a good fit to assist you with managing your new wealth. 

Sudden wealth can create several complex issues and decisions:

  • Will you be in a higher tax bracket going forward?
  • What is the best way to pay the increased taxes?
  • What is the best way to invest your new wealth?
  • Will you need a new plan for you and your family?
  • How do you invest the assets so they last a lifetime?

These, along with many other considerations, are issues that you will need to work through. Your best solution is selecting a wealth management expert with experience working with clients like you. This team can help you develop a sophisticated wealth management strategy that includes a financial plan, tax planning, an estate plan, and a charitable giving plan if you are so inclined. 

As experienced wealth managers, the Waterworth team has helped many individuals and their families who have come into sudden wealth via inheritance. We’ll share some of our insights in this blog. 

Remember, this is not a financial journey you should undertake alone. It may take a team to handle all facets of your new wealth. 


The Emotional and Psychological Considerations of Your Inheritance

The emotional and psychological burdens of sudden wealth should be considered while you deal with the financial impact. For example, losing a loved one already imposes a heavy emotional toll, so concurrently grappling with new and complex financial decisions can be overwhelming. Making sound financial choices under such conditions often requires sound financial advice from an experienced professional.

Waterworth Insights: This is where a partnership with an experienced wealth manager can be worthwhile. Delegating many of the day-to-day responsibilities for your new wealth frees you up to deal with other aspects of a traumatic loss. Financial stability during periods of emotional turmoil can assist you in making informed decisions that honor your loved ones while building long-term financial relationships that will benefit you in the future. 

What is a Beneficiary IRA?

As part of your inheritance, you may have received a Beneficiary IRA. These retirement accounts are transferred to a designated beneficiary after the original account holder passes away. Unlike a traditional or Roth IRA, which focuses on the owner’s retirement savings and tax benefits, a Beneficiary IRA is designed to provide a smooth, tax-efficient movement of assets to designated beneficiaries. 

Understanding the nuances of a Beneficiary IRA is crucial, especially regarding tax impact and required minimum distributions (RMDs). These factors are influenced by the relationship between the original account holder and the beneficiary and the age of the original account holder at the time of death. 

Spousal Beneficiary IRAs

Understanding the tax laws associated with a Spousal Beneficiary IRA is imperative for strategic estate and tax planning. You have a few options when you inherit an IRA as a spouse. Each choice has unique tax implications:

  1. You can treat it as your own
  2. You can roll it into your existing IRA
  3. You can set it up as an “Inherited” or “Beneficiary” IRA. 

For instance, treating it as your own IRA allows for the deferral of required minimum distributions (RMDs) until you reach age 72, thereby creating a potential tax advantage. Conversely, opting for a Beneficiary IRA triggers RMDs regardless of age but is based on your general life expectancy, which can benefit younger beneficiaries. 

Non-Spousal Beneficiary IRA

When you inherit an IRA from someone other than your spouse, several tax considerations can come into play. You cannot treat the IRA as your own, meaning you can’t contribute or roll it over into your own IRA. 

The withdrawal options differ significantly – for example, taking lump-sum distributions may subject you to substantial tax liabilities. Your tax obligations will also vary depending on the type of IRA you inherited, either traditional or Roth. 

You may also be required to take Required Minimum Distributions (RMDs) based on your life expectancy rather than that of the original account holder. Failure to comply with these rules can result in severe tax penalties. 

Waterworth Insights: Understanding the nuances of inheriting a beneficiary IRA can significantly impact long-term financial planning and your potential tax liabilities. Having a comprehensive tax plan in place can assist in creating a strategy tailored to your circumstances.

Inheritance and Estate Tax Considerations

While the emotional toll of losing a loved one is a substantial burden, the financial implications cannot be overlooked. Your inheritance may be subject to various taxes, including estate taxes levied on the deceased’s property and income taxes on distributed assets. 

Each state has its guidelines, and federal laws come into play as well—knowing the interplay between the two can significantly affect the amount you ultimately receive. 

Waterworth Insights: Don’t let the lack of knowledge about tax inheritance laws compromise the legacy you intend to leave behind. Failing to prepare adequately could substantially reduce the assets your heirs are set to receive, affecting your financial planning goals and strategies.

About Waterworth Wealth Advisors

Benjamin Franklin couldn’t have said it better: “If you fail to plan, you are planning to fail.” This wisdom holds especially true if you’ve recently experienced sudden wealth through an inheritance. 

That’s why the cornerstone of your wealth journey with us begins with an in-depth financial plan—a roadmap for pursuing a prosperous future.

We don’t just work in a vacuum; we engage closely with your legal advisors, accountants, and insurance experts. The aim is to craft an all-encompassing, seamless financial strategy that minimizes your risk of conflicting advice and duplicate fees.

Think of your customized financial plan as a lifetime GPS—designed to navigate you through both the expected and unexpected aspects of your financial life. 

This ensures that you and your loved ones are well-equipped to handle whatever complexities life throws your way. Connect with our team to learn more about our comprehensive wealth management strategies for you and your family. 

Tax-Savvy Strategies
Tim Waterworth

More about the author: Tim Waterworth

Tim is licensed as a Registered Representative with Kestra Investment Services, LLC, and an Investment Advisor Representative with Kestra Advisory Services, LLC. He holds himself to a fiduciary standard, which means he is obligated to put the best interests of his clients first.