Inheritance (Q & A)

Nov 2015

rick -2Q         Dear Rick:

My uncle recently passed away and left me an inheritance.  Under the terms of the trust I was left $15,000.  My cousin is the trustee of the trust and has given me a few different options for my $15,000.  The three options were to just have the $15,000 paid to me in cash.  The second was to take it in stocks.  My uncle had many shares of Ford stock and they’re willing to give me $15,000 worth of shares of Ford.  My other option is to inherit one of his IRA’s, which is basically worth $15,000.  My cousin has told me it doesn’t matter to them; they’ll do whatever is good for me.   My question is what option do you think I should take?  You should know that currently I have no investments and very little in savings.



A         Dear N.B.:

I am sorry about the death of your uncle and I send my condolences to you and your family.  In considering your options, I would first tell you that the least favorable option for you is the IRA.


The problem with inheriting an IRA is the tax consequences.  Typically, when you inherit property, it is income tax free.  Thus, if you took $15,000 in cash you would have no tax liability.  However, there is an exception to the rule and that is for things like IRA’s.  When you inherit an IRA, there is an income tax consequence.  Basically, the tax liability is not when you inherit the IRA, but rather when you make a withdrawal.  Therefore, if you inherited the $15,000 IRA, as you take distributions from that IRA you will be subject to income tax.  Therefore, from a purely income tax standpoint, inheriting the cash or the stock are much better options.


In choosing between the shares of Ford stock or the cash, there is very little difference in the income tax consequence.  When you inherit the $15,000 cash, there are no tax ramifications whatsoever.  However, when you inherit the shares of the stock, there potentially could be a tax issue.  When you inherit shares of a stock your basis is the fair market value of the stock as of the date of death.  That is a number you use in calculating whether you had a gain or loss on that stock.


In the majority of cases I would recommend you take the cash.  My main reasoning is the fact that you then have total control of your money and you can do as you choose.  Ford stock may or may not be a good stock but that really is not important.  What is important is whether Ford is good for your individual situation.  In your situation, considering that you do not have any investments and you have very little savings, I would steer away from taking stock and I would stick to the cash.


In reviewing your situation, the first thing I would do with the cash is make sure you have an emergency fund of money.  You need at least three to six months of living expenses that you can keep liquid.  Only after establishing your emergency fund can you then use the excess to begin investing.


I always tell people you should never depend upon an inheritance.  I know many people who have not begun to save for retirement believe t they will eventually receive an inheritance; thus, they don’t think they need to save.  I obviously believe this is a huge mistake.  No one should ever depend upon an inheritance.  As we all know, life takes tricky turns.  Therefore, I believe you need to plan as you will not receive an inheritance and if eventually you do, all that would do is improve your financial situation.  However, just think the bad shape you would be in if you depended upon an inheritance and it didn’t come.  Me, I’d rather be safe than sorry and that is why I always tell everyone, never ever depend upon an inheritance for your financial future.


Good luck!







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