handing over inheritance money

5 Things to Consider Before Accepting An Inheritance

Jennifer Short Oct. 11, 2022

The news of inheritance may come as a shock. It's often bittersweet because it signifies the passing of somebody close to you. You also might have mixed emotions about your inheritance. Some might be related to the actual accounts or property you are inheriting. You might not want to reject your inheritance out of respect for the individual who left you their assets in a will or trust. On the other hand, an inheritance may create unforeseen logistical or financial problems. Problems that you are unable—or unwilling—to shoulder.

Here are 5 things to consider before accepting an inheritance:

  1. Does the asset have any outstanding debt on it?

  2. Do you have the storage space for it (if it's an oversized item)?

  3. How are you going to handle the logistics (like shipping)?

  4. What are the tax consequences of accepting it?

  5. Will the inheritance cause family drama?

Like the death of a loved one, an inheritance can have a significant impact on your life. There's no law saying you must accept an inheritance. But, there are several compelling reasons to do so. You may also choose to turn down the gift. Before accepting or rejecting an inheritance, you may want to seek the advice of an estate attorney or tax lawyer.

Why Some Estate Plans Change

An estate plan is a legal document that outlines how a person's money and property should be distributed after they pass away. Some families determine who will get which bank accounts or properties. For example, some parents may ask their children what they want from the family heirloom collection.

Most people who have made a will or estate plan (testators) divide their money and property equally among heirs in an attempt to be fair. In some cases, one child may get a bigger inheritance. This can happen for various reasons, including the child's role in the family. Usually, there are talks within the family about this so everyone agrees, and no one feels resentful toward each other later.

However, not every family is as forthcoming about their estate plan. Testators and trustmakers are under no legal obligation to be impartial. They generally have the right to distribute their property however they choose. Furthermore, family relationships may change, and estate plans may change along with them.

Let's have an example. There are three siblings. Two of them have unstable marriages. The person who wrote the will (testator) may have a clause that gives the executor discretion to address this situation and keep their assets out of the hands of an estranged spouse. This could mean disinheriting a sibling or reducing their inheritance if their marriage is on bad terms at the time when probate occurs. Alternatively, somebody might be completely written out of the will and have no share in receiving any estate assets.

Similarly, the death of an heir could result in their planned inheritance being redistributed to someone else. In summary, many circumstances could lead to someone receiving an inheritance they were not expecting. Perhaps you have a childless uncle or friend who wanted to surprise you with a windfall. Usually, people have some inkling of what to expect from a loved one's estate after they pass away. But even with the best planning, sometimes things don't go as planned.

The Advantages and Disadvantages of Accepting an Inheritance

Accepting an inheritance is your choice, and may be influenced by personal circumstances. If you know there is an inheritance coming your way, the time to plan for what you are going to do with it is now. Here are some factors that may impact your decision:

  • Outstanding debt. If you inherit a house, car, or another large item with money still owed on it, you will become responsible for making payments. You might be able to afford it, refinance the debt, or sell the item--but remember that everyone who inherits would have to agree on selling. Also, keep in mind that any property inherited will need insurance coverage from this point forward.

  • Oversized items. You might inherit a car, truck, RV, or other large item or collection that has no debt obligations but causes you problems with storage. This is especially true if you don't have your own house and live in an apartment or condo with little space. Paying for more storage may be a good idea, but storing the item if you don't want it in the first place might not be worth it.

  • Logistics. Taking possession of an item might sound good in theory but could be a logistical nightmare. You may have to travel a long distance and pay for a trailer large enough to haul the piece away. Maybe shipping is an option, but then who will cover the transport costs? The money will need to come either out of the estate or your own pocket.

  • Tax consequences. If you live in one of the following six states, know that there's an inheritance tax on beneficiaries: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Also, keep in mind that—in addition to a potential 1-20% inheritance tax levied on the value of assets you inherit—income-producing assets such as real estate, securities, and retirement accounts can bump up your taxable income and possibly even move you into a higher tax bracket. So, it's crucial to understand exactly how inherited assets may impact your financial situation.

  • Personal considerations. Perhaps you just don't want an item left to you in a will by someone else. You may also suspect that another family member would be upset if you received it rather than them. Inevitably, inheritances will create conflict and irritation among family members. Consider adopting the high road and squashing problems before they arise and lead to legal conflicts.

Acceptance or refusal, whichever you choose, be ready to submit documents stating your intentions. Another thing to keep in mind is that if you reject an inheritance, you will not influence who receives it. If the will does not name a backup (contingent) beneficiary, it passes back to the estate and goes to the next beneficiary according to state law. To make sure that a specific person receives what you are rejecting, you may accept it and then gift it to them. However, be wary of the possible gift tax implications.

How to Manage Your Inheritance and Prepare for the Future

An inheritance may be a pleasant surprise, but the majority of people anticipate receiving an inheritance at some time during their life. When that day comes, you'll want to make the most of your inheritance. Working with a knowledgeable estate attorney and financial advocate can help you assess your situation, preserve your wealth, plan for the future, and create your estate plan.

If you've recently received an inheritance, and don't know how to make the most of it, contact our office at 614-389-9711 to schedule an appointment.

Ready to create your own estate plan? Get started with our Consumer's Guide to Estate Planning in Ohio.