An inheritance can be a meaningful financial opportunity, but it also brings complexity, emotion, and responsibility. Whether you expect to inherit modest assets or substantial wealth, preparation is key to ensuring the inheritance supports your long-term goals rather than creating unintended challenges.
Thoughtful financial planning before assets are received can help reduce taxes, avoid costly mistakes, and provide clarity during what is often an emotional time. Working with a wealth management team that understands the full picture can make all the difference.
Start With Understanding, Not Assumptions
Many people assume they understand what they will inherit, but expectations often differ from reality. Important questions to consider include:
- What types of assets may be inherited?
- Are assets held in taxable accounts, retirement accounts, trusts, or real estate?
- Are there specific beneficiary designations or trust provisions?
Having open conversations, when appropriate, can prevent surprises and allow for better planning.
Inheritance Is Often a Life Transition, Not Just a Financial One
An inheritance may coincide with major life changes, such as:
- The loss of a parent or loved one
- Retirement or career transitions
- Changes in family dynamics
Decisions made during emotionally charged periods are more likely to be rushed or misaligned. Creating a plan ahead of time provides structure and perspective.
Understand the Tax Treatment of Inherited Assets
Different assets are taxed differently, which can significantly impact after-tax value.
Common Tax Considerations
- Inherited taxable investments generally receive a step-up in cost basis under IRC §1014, with limited exceptions
- Inherited IRAs prior to the SECURE Act of 2019, beneficiaries of inherited IRAs were generally permitted to stretch distributions over their own life expectancy, allowing for decades of tax-deferred growth. The SECURE Act significantly changed this landscape, and SECURE Act 2.0 further refined it, introducing the 10-year rule and, in certain cases, annual required minimum distributions for most non-spouse beneficiaries.
- Roth IRAs generally allow tax-free distributions if rules are followed
- Real estate also receives a stepped-up basis, though post-inheritance appreciation and state-level estate or inheritance taxes may apply
Understanding these rules in advance can prevent unnecessary taxes.
While Texas does not impose a state estate or inheritance tax, beneficiaries inheriting assets from individuals in other states may be subject to state-level taxation. It is important to note that several states impose their own inheritance or estate taxes with exemption thresholds well below the federal level, which can meaningfully affect the net value of inherited assets.
Know the Rules for Inherited Retirement Accounts
Inherited retirement accounts require careful attention:
- Most non-spouse beneficiaries must empty inherited IRAs within 10 years, though eligible designated beneficiaries (such as surviving spouses, minor children of the decedent, disabled individuals, and those not more than 10 years younger than the decedent) may still use the stretch IRA provisions
- Annual required minimum distributions may be required during the 10-year window if the original account owner had already begun taking RMDs before death
- Timing withdrawals can affect tax brackets and Medicare premiums
Strategic withdrawal planning can materially improve outcomes.
Plan How an Inheritance Fits Into Your Bigger Picture
An inheritance should complement your existing plan, not replace it. Consider how it may affect:
- Retirement timing
- Investment allocation
- Debt reduction
- Charitable giving
- Family support
Sudden changes in wealth can distort risk tolerance and decision-making if not thoughtfully integrated into a comprehensive financial plan.
Avoid Common Inheritance Mistakes
- Making major purchases immediately
- Investing without a plan
- Ignoring tax implications
- Letting inherited assets remain unmanaged
- Failing to coordinate with your own estate plan
Often, the most valuable decision is choosing what not to do right away.
Consider Family and Legacy Implications
An inheritance may affect family relationships and future planning:
- Coordinating inheritances with spouses
- Updating beneficiaries and estate documents
- Considering how wealth may flow to the next generation
Clear planning, that takes a holistic approach, can reduce future friction and uncertainty.
When Professional Guidance Makes Sense
Inheritance planning often intersects with:
- Wealth management tax planning
- Investment management
- Retirement planning
- Estate planning
Working with a fee-only financial planner, like Goodman Financial, before assets are received can help ensure decisions are proactive rather than reactive. A financial advisor can help coordinate tax, investment, and estate disciplines to protect and grow your inheritance.
Final Thoughts
An inheritance represents both opportunity and responsibility. Preparation allows you to honor the intent of the gift while aligning it with your own financial goals and values.
Thoughtful financial planning can help ensure inherited wealth becomes a lasting foundation rather than a fleeting benefit. If you are preparing for an inheritance or navigating one now, our Houston based wealth management firm, Goodman Financial, is here to help you make confident, well-informed decisions.
Contact us to connect with a Goodman Financial advisor.
Goodman Financial Corporation is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including form ADV Part 2A filed with the SEC, can be found at https://adviserinfo.sec.gov/. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax, or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.
This firm is not a CPA firm.
