Inheritances: Financial Planning Tips for You and Your Beneficiaries

Inheritances: Financial Planning Tips for You and Your Beneficiaries

Inheritances are a way to transfer wealth when you’re gone, be it to the next generation, a charity, or friends and business partners. But both receiving an inheritance and planning to leave one can be complicated.

As a financial advisor in Santa Rosa, CA and founder of Montgomery Taylor Wealth Management, our team offers clients whole wealth management, from estate planning to retirement planning and wealth management. In our experience, there are 3 common oversights when it comes to leaving (and receiving) an inheritance that can turn an incredible gift into a financial burden: Taxes, a plan for the money and professional help!

Whether you are creating or updating your estate plan, or recently received a sudden windfall of cash, take some time to consider the big picture to ensure the gift is used as hoped.


Schedule a no-obligation conversation with the team at Montgomery Taylor Wealth Management to see how we can help.


When Getting an Inheritance


Taxes on an inheritance can be complex. Don’t be fooled by the terms “inheritance tax” and “estate tax,” which are sometimes used interchangeably (or the term “death tax,” which is deployed as an umbrella term). Inheritance taxes and estate taxes are quite different.

An inheritance tax is levied on the inheritance itself. It’s a federal tax and will be taken from the value of property before heirs receive it. This federal inheritance tax only applies if the inheritance’s value exceeds $11.58 million (for singles) and $23.16 million (for a married couple), so in some cases, no inheritance tax will be levied at all.

States can have a separate exemption amount, so it’s important to discuss taxes with a financial advisor.

Estate taxes, on the other hand, are paid by the beneficiary. Currently, just six states levy estate taxes: Maryland, Nebraska, Kentucky, New Jersey, Pennsylvania and Iowa.

Estate taxes also depend on your relationship with the deceased. Spouses don’t pay estate taxes, for example. Children and grandchildren don’t always either, but other beneficiaries do.

Also, be aware that beneficiaries have to pay ordinary taxes if they inherit retirement fund assets, such as 401(k)s and Traditional Individual Retirement Accounts (IRAs).

A plan for the money

As a financial advisor in Santa Rosa, CA, one of the biggest mistakes I see heirs make is not having a plan for the money they inherit. Without a plan, it can be tempting to spend money quickly, buying things you feel you deserve or have always wanted, like expensive cars or real estate. But this can make the money go fast! When you have a plan in place, you can make sure your inheritance will benefit your future, and possibly even your own heirs, and not just provide an immediate reward.

While it’s perfectly fine to spend inheritance money you receive on big-ticket items if that’s what you want to do with it (and there’s sufficient money to do so), we recommend pausing, even briefly, first to consider what using the money really means. Take time to consider your life goals. Can your inheritance help you achieve them? How?

There are strategies that can help you do both – reward yourself in the short-term and put money aside for later. Talk to a financial advisor and understand your options.

How a financial advisor can help

As the first Certified Public Accountant (CPA) Certified Financial Planner (CFP) in Sonoma County, Montgomery Taylor Wealth Management can help in many ways. Not only do we have a background in taxes, but we offer whole wealth management, allowing us to access your tax situation and apply it to your overall financial plan.

A financial advisor can also help you create a plan that helps you maximize your inheritance, be it through investments, retirement contributions or even your own estate plan. Don’t underestimate the peace of mind that can come from enlisting professional help!

When Leaving an Inheritance


If you’re leaving an inheritance, it’s also important to understand the distinction between inheritance taxes and estate taxes, as well as whether estate taxes apply in your state.

Many people are interested in reducing taxes on their estate and avoiding taxes that their heirs will have to pay. There are several methods of doing so.

First, you can begin giving gifts to your heirs to reduce the size of your estate while making sure they receive the assets. Currently, you can gift up to $15,000 per year without having to pay a gift tax (for single people) and $30,000 (for married couples).

Second, you can set up a trust for the assets you plan to bequeath to your heirs. When you set up a trust, the trust owns the assets rather than you. As a result, any inheritance taxes are avoided. In a revocable trust, you have access to the assets in the trust if you change your mind. In an irrevocable trust, you do not.

Third, to avoid your beneficiaries having to pay taxes on retirement funds you plan to leave to them, you may be able to convert them from a Traditional account to a Roth account. Roth accounts are not taxed upon withdrawal, as long as they have been held for five years or more. Make note: If you do convert Traditional retirement accounts to Roth accounts, tax will be due in the year of conversion! Traditional retirement accounts are always taxed at the ordinary rate in the year they are withdrawn, and a conversion effectively withdraws those funds and then places them in a Roth account.

One strategy isn’t best for everyone. Discuss your options with a financial advisor.

A plan for the money

Many people don’t know that you can actually plan when and how you will leave your beneficiaries their inheritance. It all depends on how you set up your estate plan.

One strategy is a Last Will and Testament, which specifies who (or what) will receive your assets. A properly executed Will goes into effect upon your death, although it may have to go through probate.

The second is a trust. There are several different types of trusts. A Living Trust goes into effect during your lifetime, because a trustee (who controls the assets) manages the assets for the intended beneficiaries. Like regular trusts, Living Trusts can be both revocable (you can change your mind) and irrevocable (permanent).

Regular trusts go into effect upon your death. All trusts avoid probate, which is one of their advantages. Trusts also allow you to determine what assets your heirs will receive and at what ages or points in time.

You can also distribute your assets as gifts during your lifetime, if you prefer.

Again, there’s not one strategy that works best for everyone. Discuss your options with a financial advisor.

How a financial advisor can help

 At Montgomery Taylor Wealth Management, we believe that estate planning should be an integral part of a comprehensive financial plan. If you have a question that is not addressed here or would like to discuss your specific situation and goals in more detail, let’s talk. The one thing you don’t want to do is leave your estate planning for “later.”

Montgomery Taylor Realistic Financial Planning