How To Manage & Invest Inheritance Money

When your loved one dies, your life changes dramatically, especially if the death occurs suddenly and unexpectedly. Not only will you have to notify your family members, but you’ll also need to make the funeral arrangements. Right after the funeral, if you are the executor of the estate, you have to deal with legal matters including finding wills and trusts, gathering records, and reporting the information to beneficiaries, and handling financial affairs such as distributing assets and paying taxes. Without your spouse, especially after many years of marriage to that person, your life will never be the same.

When it comes to financial planning and managing personal tasks, knowing what to do and when can help prevent you from feeling overwhelmed during such a difficult time. If you would like to delegate this overwhelming task, we are happy to work with you, your estate attorney, and tax advisor.

Below are some of the common questions prospective clients want to know:

What Are The Key Steps and Time Line for Settling an Estate?

Estate settlement requires a wide range of skills and carries a long list of responsibilities, from preparing and filing taxes to resolving conflicts among beneficiaries. It also carries significant legal liabilities and requires a commitment of time and energy—it can take as much as two years to settle even the most straightforward estates.

Review the will and gather documents: Carefully review the will and all trust documents to make sure you have a full understanding of all instructions, terms and conditions. Some of the tasks you’ll be facing include: paying funeral expenses and other debts that require immediate attention, and collecting documents such as the death certificate, life insurance policies, birth certificates, military discharge papers, marriage certificates and real estate titles. You’ll also need to gather financial records such as bank, brokerage and retirement account statements for the past three years and handle claims submitted by creditors.

The executor of an estate may be an individual such as the decedent’s spouse, child, advisor or other person, or it may be a financial institution such as a trust company or bank. If you are the executor, you can also name a financial institution to serve as co-executor, providing valuable guidance and resources along the way. It’s important to have a clear understanding of the process and remain actively involved.

File the Will and Probate Petition: Most states require the executor to file the will in probate court, even if the estate is held in trust and is not required to go through the formal probate process.

Secure Personal Property: All property such as homes, boats, furniture, antiques, artwork, clothing, photographs and jewelry as well as personal documents such as journals, diaries and correspondence must be secured and protected. It is important to preserve all items, including items that were promised to a child or relative, until the estate is properly settled.

Appraise and Insure Valuable Assets: After all of the estate’s holdings have been identified and located, consult with appraisers and insurance specialists to make sure assets are properly valued and insured (vacant homes require special attention because traditional policies terminate when a home is not occupied).

Cancel Personal Accounts: When appropriate, cancel personal accounts, subscriptions and memberships.

Gather financial assets: Collect assets in IRA/401(k) accounts, brokerage and savings accounts, as well as financial interests in partnerships or other businesses, and transfer them into the estate account.

Determine Cash Needs: Review estate holdings and decide what to sell, if necessary, to raise cash for estate taxes and other expenses.

Distribute tangible items to beneficiaries. Distribute personal property as directed by the will or trust document. This is an area that requires the diplomacy of an experienced executor, since surviving family members often have strong emotional attachments to items of sentimental value.

Remove Estate Tax Lien: Before any property or assets can be sold, obtain a release of the federal estate tax lien that the IRS attaches to all real assets. When the IRS discharges the lien, the buyer can take title to the property. By the sixth month, all claims from creditors should be resolved.

Determine Location of Assets and Secure “Date of Death Values”: One of the most challenging responsibilities of the executor’s job is taking an inventory of the entire estate and determining the value of all assets, including investment accounts, business interests, insurance policies, bank deposit boxes and intellectual property (patents, licenses and copyrights). Taking possession of property located outside the United States can be particularly challenging.

Submit Probate Inventory: Submit a detailed inventory of all real estate, personal property, bank accounts and debts to probate court.

File taxes and other IRS forms and make partial distributions: File the estate tax return and make a partial distribution of financial assets to beneficiaries according to the directives of the will. This may mean an outright distribution (transfer of title), or property may be distributed to a trust and distributed over time. Maintain reserves, usually at least 20% of the total value of the estate, to pay the estate’s expenses until it is closed.

Federal Estate Tax (Form 706)

Within nine months, prepare and file a federal estate tax return. It usually takes the IRS another six to nine months to process the return.

State-Level Estate Taxes

Today, many states including Connecticut, Delaware, Massachusetts, Maine and New York, plus the District of Columbia, levy their own estate or inheritance taxes. Rates can be as high as 20%.

Information about Beneficiaries (Form 8971)

Thirty days after filing the federal estate tax return, provide the IRS with information about all beneficiaries and the property they inherited.

Gift and Generation-Skipping Transfer Tax (Form 709)

If necessary, file a generation-skipping transfer (GST) tax return and/or gift tax return. It is often recommended that family members use their GST tax exemption to establish Delaware dynasty trusts that can last in perpetuity, ensuring that distributions to grandchildren and other remote descendants are not subject to any transfer taxes in the future.

Estate and Income Tax (Form 1041)

Estates and irrevocable trusts generally are separate taxpayers. That requires obtaining separate tax ID numbers and filing fiduciary income tax returns. These are specialized returns that require a CPA familiar with the filings.

Final Individual Income Taxes (Form 1040)

The estate or trust have tax returns to file. The executor or successor trustee is also responsible for ensuring the decedent’s final individual returns are filed, and addressing any issues with past filings.

Make final contributions.

- 1. Secure closing letters from the IRS
  2. Pay any remaining expenses
  3. Distribute any reserves that were held pending resolution of contingencies
  4. Prepare and file the final accounting
  5. Make final distributions
  6. File petition for discharge of executor responsibilities

What Are The Required Minimum Distribution (RMD) Rules For Inherited IRAs?

RMDs are designed to ensure that investments in IRAs don’t grow tax-deferred forever and this carries over to the beneficiary of the IRA. The rules for how IRA beneficiaries must take RMDs will depend on when the account owner passed away.

Inherited RMD calculation methods
The date of death of the original IRA owner and the type of beneficiary will determine what distribution method to use. You must take an RMD for the year of the IRA owner’s death if the owner had an RMD obligation that wasn’t satisfied.

For an inherited IRA received from a decedent who passed away after December 31, 2019:

Generally, a designated beneficiary is required to liquidate the account by the end of the 10th year following the year of death of the IRA owner (this is known as the 10-year rule). During the 10-year period, the beneficiary may take distributions of any amount at any frequency. There are exceptions for certain eligible designated beneficiaries, defined by the IRS, as someone who is either:

The IRA owner’s spouse
The IRA owner’s minor child. Once a minor child reaches the age of majority, they’ll become subject to the 10-year rule.
An individual who is not more than 10 years younger than the IRA owner.
Disabled (as defined by the IRS).
Chronically ill (as defined by the IRS).

An eligible designated beneficiary may choose to use either the 10-year rule or the lifetime distribution rules that were in effect prior to 2020 and are specified in the “For an inherited IRA received from a decedent who passed away before January 1, 2020” section below.

A non-designated beneficiary (e.g., a non-individual such as an estate or charity) would generally be subject to the 5-year rule if the account owner died before he or she was required to begin taking RMDs (April 1st of the year following the year in which the owner reached RMD age). If the IRA owner passed away on or after April 1st of the year following the year in which the owner reached RMD age, the non-designated beneficiary would be subject to an RMD based on the original IRA owner’s life expectancy factor. Special rules apply for certain types of trusts.

For an inherited IRA received from a decedent who passed away before January 1, 2020:
When a beneficiary becomes entitled to an IRA from an account owner who died before he or she was required to begin taking RMDs (April 1st of the year following the year in which the owner reached RMD age), the beneficiary can choose one of two methods of distribution: over his or her lifetime or within five years (the “five-year rule”).

Lifetime distribution
Spouse as sole primary beneficiary – If the owner’s spouse chooses to take the IRA as a beneficiary rather than assume the account, he or she can choose when to begin taking RMDs on the basis of his or her own life expectancy. The spouse must begin taking RMDs by no later than December 31 of the year after the owner’s death or December 31 of the year the owner would have reached RMD age. The spousal beneficiary should not enroll in our RMD Service until the year he or she intends to begin taking RMDs. If the owner’s spouse chooses to assume the IRA, he or she must begin taking RMDs by the later of December 31 of the year after the owner’s death or April 1 of the year after the spouse reaches RMD age.

Non-spouse and when spouse is not sole primary beneficiary – An individual non-spouse beneficiary must begin taking RMDs on the basis of his or her own life expectancy by December 31 of the year after the owner’s death. Multiple beneficiaries can take RMDs on the basis of their own life expectancies if all of the beneficiaries have established separate accounts by December 31 of the year after the owner’s death and starting in that year. If all multiple beneficiaries have not established separate accounts by that December 31 date, all beneficiaries must take RMDs on the basis of the oldest beneficiary’s life expectancy starting in the year after the owner’s death.

Five-year rule
Any individual beneficiary may elect to distribute the inherited IRA assets over the five years following the owner’s death. The distribution must be completed by the end of the year containing the fifth anniversary of the owner’s death. Any non-individual beneficiary (except for a qualified trust) must use the five-year rule if the owner died before beginning to take RMDs.

Roth IRAs & RMD
Roth IRA owners don’t need to take RMDs during their lifetimes, but beneficiaries who inherit Roth IRAs must take RMDs.
If you’re inheriting a Roth IRA, your RMD would be calculated as outlined above.

When Do I Have To File Federal Estate Taxes And Which Form Do I Need To File For?

Generally, the estate tax return is due nine months after the date of death. A six month extension is available if requested prior to the due date and the estimated correct amount of tax is paid before the due date. The gift tax return is due on April 15th following the year in which the gift is made.
For example, if someone dies in March, before filing a tax return for the previous calendar year, two returns must be filed: one for the previous calendar year, and one for the year of death.

The executor of a decedent’s estate uses Form 706 to figure the estate tax. This tax is levied on the entire taxable estate and not just on the share received by a particular beneficiary. Form 706 is also used to figure the generation-skipping transfer (GST) tax. For decedents who died in 2020, Form 706 must be filed by the executor of the estate of every U.S. citizen or resident.

You need to file Form 706 for the estates of decedents who were either U.S. citizens or U.S. residents at the time of death. For estate tax purposes, a resident is someone who had a domicile in the United States at the time of death. A person acquires a domicile by living in a place for even a brief period of time, as long as the person had no intention of moving from that place. Decedents who were neither U.S. citizens nor U.S. residents at the time of death file Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return, Estate of nonresident not a citizen of the United States. An estate also have to file a tax return. IRS Form 1041, U.S. Income Tax Return for Estates and Trusts, is required if the estate generates more than $600 in annual gross income. The decedent and their estate are separate taxable entities. … Most deductions and credits allowed to individuals are also allowed to estates and trusts.

Some states collect an inheritance tax as of 2020 and they are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Each has its own laws dictating who is exempt from the tax, who will have to pay it, and how much they’ll have to pay.

How Does An Executor Close An Estate And What Happens If You Don’t Close An Estate?

Once all assets are allocated accordingly, the executor must file a closing statement or closing affidavit with the probate court. This document serves as a formal notice that all property has been distributed and all other estate obligations have been taken care of.

If an estate is not properly probated and closed in a timely manner, there may be a number of consequences that can jeopardize the estate: The statute of limitations for creditors’ claims is extended. Assets may lose value or be lost altogether. The state may claim the assets.

File a closing statement with the court.

To close an EIN number for an estate, executors can either request an estate closing letter to be issued to the address of record by calling 866-699-4083 and providing the name of the decedent, his/her Social Security number, and the date of death.

If the deceased was receiving Social Security benefits, the benefit received for the month of death or any later months must be returned.

Are distributions from an estate taxable to the beneficiary?
While beneficiaries don’t owe income tax on money they inherit, if their inheritance includes an individual retirement account (IRA) they will have to take distributions from it over a certain period and, if it is a traditional IRA rather than a Roth, you pay income tax on that money.

Inheritance Do’s:
DO put your money into an insured account until you know what to do with it and make future plans with the money.
DO consult with a financial advisor before you start spending more freely: make your future plan first.
DO pay off all your high-interest debts like credit card loans, personal loans, mortgages and home equity loans should come next.
DO contribute to a college fund for your children if you have them.
DO treat your money with extra care as if it were your money, earned with sweat and labor.

Inheritance Don’t’s:
DON’T start buying things that you couldn’t afford before with your own money such as land, beach house, or investing in property that you have no previous experience without doing any research.
DON’T become invincible. Think why your loved one left money for you before you start investing in this and that.
DON’T mix your inheritance by putting it in a joint account. Keep it separate from joint money with your spouse.

For more information about the rollover rules, go to irs.gov or consult a tax advisor.

You should consult your tax advisor if you have any questions about taking distributions in accordance with this rule.

Additional Questions we will help you navigate for managing & investing inheritance money:

Do You Need to Take a Required Minimum Distribution (RMD) From Inherited Retirement Assets?

Have You Completed Tax Planning on Inherited Assets with Your CPA or Tax Professional?

Have You Created Debt Reductions or Elimination Strategies?

Have You Explored Decedent’s Annuities & The Complicated Payout or Rollover Options?

Have You Started The Life insurance Payout Process?

Has Your Estate Planning Attorney Streamlined The Process of Illiquid Assets?