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Inheritance: What to Know About Being a Beneficiary

Episode 36

Inheritance: What to Know About Being a Beneficiary

Posted March 6, 2024 at 10:30 am
Cassidy Clement
Interactive Brokers

What are some topics to think about when receiving an inheritance? There can be tax implications or pieces that are not expected. Nancy Nelson, CPA, Consultant to Interactive Brokers LLC, joins Cassidy Clement, Senior Manager of SEO and Content to discuss.

Summary – Cents of Security Podcasts Ep. 36

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Cassidy Clement 

Welcome back to the Cents of Security podcast. I’m Cassidy Clement, Senior Manager of SEO and Content at Interactive Brokers. Today, I’m your host for our podcast. Our guest is Nancy Nelson, CPA and Consultant to IBKR LLC. We’re going to discuss some topics to think about when receiving an inheritance. There can be tax implications or pieces that are not expected. So we’re going to discuss. Welcome to the program, Nancy. 

Nancy Nelson 

Hi, Cassidy. It’s nice to be here. 

Cassidy Clement 

So thanks for joining us. Can you give the listeners some industry background as this is your first podcast on Cents of Security? 

Nancy Nelson 

Sure, I am a certified public accountant and have been for many, many years. I have practiced in all sorts of different industries, but primarily in the brokerage industry. And in the family office industry, which means wealthy people who have an office to manage their affairs.  

And so that’s my background. At one point it was kind of interesting talking about inheriting things. I worked for 13 dead people and one live person, and basically he controlled the money that had been left to him by his ancestors, the 13 dead people, for himself and his children and his cousin’s children. So my background in this is deep. 

Cassidy Clement 

That’s perfect for what we’re going to talk about today. So really this kind of came about because thinking about a lot of people in the target market of this show, people getting into the financial space, there’s a chance that they could be inheriting different pieces from their family members or a loved one. So what are some examples of commonly inherited items or commonly inherited financial items? 

Nancy Nelson 

So I think I’d like to break it down into three groups. There’s the financial things that you can inherit. Most of those are probably pretty obvious to your audience. There’s checking accounts and savings accounts. There can be CDs, treasuries and treasury bonds, stocks, mutual funds. Then you kind of get into the ones that are a little bit more tricky.  

Retirement accounts such as IRAs or 401Ks. There can be annuities that were retirement accounts and there can be pensions where you might be a secondary beneficiary of a pension if someone has a pension, which is very common with some older workers in the manufacturing industry and in city and county government or education of that type. It’s not as common in industries such as what we’re in.  

And then there’s life insurance. So those things are the common things that you might see in terms of money coming in. And then there’s always real things, like houses and cars and antiques, art, coins, stamps, things people forget about. Jewelry. Some of the trinkets that you’re looking at or you eat off of might even have value.  

Then there’s businesses. Does your family have a business? Do you inherit part of it? Who owns it? A farm, farmland or all the machinery and equipment. And then there’s what I call strange things, and I’m going to just use one example here in the farming industry. Some other things- horses, dogs. Semen has value. So there might be frozen semen in a semen bank someplace that you inherit.  

Then there’s the bad side of inheritance to me. This is the third side I’d like to break down, is debts. We all have them and some are simple. There obviously could be medical debts at death because someone could have been ill. Charge cards. We all, again, have that. Mortgages. There might be a mortgage on the home or the business or loans on the home or the business. And mortgages can work two ways. There can be a regular mortgage that we’re all used to where you pay the bank every month, but there can also be, as they advertise on TV, a reverse mortgage where the bank pays you every month, but you still have to pay back the bank.  

There’s loans. There might be loans to family members, there might be others, there might be loans to the business. And then there’s a couple other things. There’s legal debts that you might have. You might incur legal debts to settle an estate, and if there was some way the death was caused by some kind of incident, the deceased might be sued or the deceased might be suing, so you might have legal expenses that way.  

And then there’s one final thing that you also might inherit that I will tell you that my sister and I both missed when my mother died. And that’s funeral and burial policies. A lot of times people just don’t tell you that they’re out there. So those are some of the things that I thought of. 

Cassidy Clement 

There’s a lot of different pieces that people don’t always think of. I know, like you had said, farmland is kind of an odd one or maybe animals. Also, you’re right, you don’t want to think about “the end” perse, but yeah, the funeral expenses, policies, things like that.  

What’s really considered a large inheritance though or a small inheritance in the US? Is there like a monetary value or maybe something from a tax perspective? 

Nancy Nelson 

This is something that has changed over the years. Every state has slightly different laws, but most of them follow the federal and say that $12,000,920 if you die in 2023 and it’s indexed for 2024 (I didn’t look it up), would not be subject to federal income estate tax. 

However, and this is a big however, that’s a huge inheritance. Most of us don’t ever see that kind of money in our life. But if you own farmland, acres and acres of farmland, it could easily be worth $12 million. Not even hard. But let’s talk about your real question. What’s a large inheritance and what’s small?  

You and I live in a bubble because we live in Connecticut. We live in Fairfield County, Connecticut. The New York Metro area, which is a bubble. It’s a bubble of wealth. So what we think is small or large could be very different than someone and the old saying used to be, “what happens in Peoria, IL?” was what you had to look at, which was the standard. And so, in Peoria, a small estate might be $5000 or $6000, and a big estate might be $100,000. To us, a $100,000 is a small estate, so I think it’s very much geographic in the United States.  

So if I had to put numbers around it that fit the US, I was going to say $50,000 or less is a small estate and $100,000,000 or more is a big estate. And when you’re talking about people that own businesses or have been CEOs or stuff, $100 million isn’t outside of the realm of possibility, but for the average person who died, $50,000 to $1,000,000 to $2,000,000 or $3,000,000 is probably what most people’s estate is, and even that is on the high end for some areas of the country. 

Cassidy Clement 

Well, when it comes to just being the beneficiary in any of these scenarios, small, medium, large, what are some steps that a person should take when evaluating what they’ve got or going to receive if they know ahead of time that they are going to be the beneficiary? 

Usually most people think, is there any debt associated? What are my taxes going to be like? Are there potential investments I have to get access to? Or maybe should I be talking to a financial advisor about this? What are some things that usually, the steps I guess you could say, that people normally should take when evaluating what could be coming their way? 

Nancy Nelson 

I think, first of all, knowing what you’re going to get. And that’s not always easy because we’re all reluctant to talk about our own deaths. So going to the person who is either elderly or failing, it’s hard to approach them. It’s a hard conversation for them to have. And it’s a conversation they may be totally unwilling to have, too.  

I grew up with a parent who steadfastly thought we didn’t need to know until the day she was gone. And so my sister had what I referred to as “the great treasure hunt”. And there’s places to help with that and to start with that.  

So some of the things that I would think about if I was looking at an inheritance is to understand the first things. And that would be getting through the first let’s say 14 to 30 days. You’re going to have funeral expenses. You’re going to have burial expenses. You’re going to need a lawyer. I believe that there’s probably not a state where you’re not going to have at least minimal legal filings.  

Know who the person’s advisors were. Who’s the lawyer? Who’s their broker? Where are things? Who’s their banker? That’s very important. That’s your first step. If you need to go on “the great treasure hunt” like my sister and I, I will tell you that the best place to start is a tax return. Because many things, not everything produce income or items that need to be reported on your tax return annually, so it gives you a place to start.  

And if you’re fortunate enough to have an accountant that has prepared that tax return, they may have some insights, too. So, it might be a place to start. The other thing is be a little bit prepared. It is very likely that there’s going to be an outlay for a funeral, perhaps a burial plot if you don’t know where that is. So that’s a very important thing to know where it is. I mean you may know because it might be a second person to die in a family. But you may not. So you have those things.  

It may be that the first person to die only had one spot and now you don’t have any place to put the second person or what their wishes are. Some people don’t wish to have any permanent site. They know it doesn’t hold value to their people left, I think, is a good way to put it. So those are the things that you need to know immediately.  

But know that some of that cost might have to come out of your own pocket because it’s not, person dies, you get their money tomorrow. You’re going to need.. there’s a process to it. So you need death certificates. Depending on the circumstances of the death and the state you’re in, and sometimes even the time of the year, a death certificate, which comes from the county of death, can take days. Very rarely. Weeks is much more common. And I’ve even seen it take three or four months in certain places. In certain states, let’s say, and I’ll use Florida as an example because I know it to be true. The person who died, died in Florida because that’s where they live now. And you live in Iowa. You’re going to have to buy a bond in Florida showing the courts in Florida that you’re going to administer the estate fairly but you’re not going to run off with the money and leave everybody else out. And Florida is one of those states where that happens. As far as I know not the only state. And it also depends on how big the estate is, whose name is executor, all those things.  

And no one’s exempt from this, by the way. It’s standard procedure. Just because you say, well, I don’t need the money. I’m never going to take it. I’m going to give it to my sibling or my aunt or my uncle or whoever doesn’t mean they’re going to exempt you from that bond. You don’t put up the entire value of the bond. You buy a policy is basically what it is, and it may be $200 or $300, it may be $1000, depending on the size of the estate and the value of the bond that you need to put up.  

So those are all the things you should be prepared for. You’re probably going to need an estate lawyer. If the person has a will and hopefully you know where that is, that’s something you should be asking if they’re ill or elderly, then a lawyer has drafted that and that’s your starting point.  

Go back to that lawyer to help you administer that estate. However, you may find out that the will was drafted in the state that they’ve lived in for years and now they live in Florida. They died in Florida. You need a Florida lawyer. Or the flip side of that. The lawyer is dead and nobody’s taken his practice. Or if somebody has, you can’t figure it out. Another part of the great treasure hunt for my sister and I. And so you need to go out and get somebody else. So how do you find somebody?  

Well, you ask around. If you’re fortunate enough to be close to your family or live nearby, you may know somebody. But if you’re not, for example. I’m going to use my mother again. She lived in Arizona. My sister lives in Georgia and I live in Connecticut. Well, we had no clue, but my mother lived in an assisted living facility, so we asked around her friends in the facility. We asked the administrators of the facility. We got five names. We called them all up. We talked to them and whoever we clicked with was who we hired. So it’s a little bit of doing that research. And it catches you off guard because you never expect to do this, and you’re mourning at the same time. So it’s a difficult process, but the sooner you get started, the better off you are because, first of all, if people think they’re going to get money and they really need the money, they can get greedy on you and come after you for not dealing with the estate. The longer you wait can have other financial implications. For example, if you have a home and it sits empty and there’s damage to the home either because of weather related things or vandalism, that’s going to cost you more money than dealing with the process.  

Everybody grieves, and we all grieve in our own way. But sometimes dealing with problems is better than leaving it, because it only amplifies your grief when it becomes a hassle. 

Cassidy Clement 

So this next question that I have kind of leads into a following question. But you always hear about sometimes people will “gift” items instead of waiting until it becomes something of an inheritance. Could you speak a little bit to that because some people, I think do it maybe for a tax benefit or while they’re still around, they gift something. You always hear about that. What say you? 

Nancy Nelson 

So I think it depends on your economic circumstances. Let’s start with that statement. There are Gift Tax rules in the United States, both Federal and State. They’re not necessarily matching. Again, Connecticut is an excellent example of this. The Federal Gift Tax and the Connecticut Gift Tax have two very different thresholds of giving. So every year, and this is the number that changes every year. Or frequently, let’s put it that way. You can gift any one person and I believe for 2024 it’s $17,000 and while we’re chatting, I’ll look it up.  

And so, at that amount, without any Gift Tax implications, Federal or State. And that means you can give it to a family member, you can give it to your dog walker, you could give it to your cleaning lady, you can give it to anyone without any Gift Tax filing required or implications Gift Tax being assessed. And I did look it up. It’s $18,000 for 2024, so you can give away that $18,000.  

Now what does this do? If you have a very large estate, number one it reduces that estate because you give away that money. Money’s gone. So it’s not part of your estate. Secondly, if the person needs that money, then they might need it now. Not when you die 10-15 years from now. So that’s the one thing.  

The other thing that is very useful and a lot of grandparents do is pay for a child’s education. Now there’s a lot of ways to do that. So if the child is attending private school, then the grandparents pay the tuition. That’s not subject to Gift Tax. So the grandparents pay it, they write the check to the school and that’s a done deal. Done deal. And that may be at any level of education, basically elementary through college.  

So that’s one way. And that, again, removes that money from the grandparents’ estate, has a benefit to the child that they need now, and it’s not subject to Gift Tax. Now this is very important. You’ve got to write it to the school, not to the child, not to the child’s parents. Otherwise it’s a gift. And then it’s subject to Gift Tax. And if it’s over $18,000, you’ve got to file it. 

The second thing you could do is contribute to some kind of college savings plan. Commonly for two is 529 plan.  

Now that is a little tricky. That’s a gift. So, you can put in $18,000 for this year into that 529 plan, but you can do it for each of the grandchildren. And maybe even your child because if you give your child more than $18,000, it’s a gift.  

There’s also a more complicated rule about 529 plans where you can make one big 5-year contribution at the front of it. However, that’s more complicated and really beyond the scope of this. So I’m not going to go delve into that, but it’s something that can be done. So those are the kind of things that you can do. 

(Listen here to our podcast on saving for college and 529 plans)

Now, let’s flip this around a little bit. Technically, if you go out and buy your grandchild a car or your grandparent buys you a car is more what we’re talking here for your birthday. Say you turn 21 or 16. Or 18 whatever year it is, you can get your driver’s license in the state you give it live in. And you get a car. Technically, that’s a gift. There’s not very many cars, unless it’s a used car, that you can buy for less than $18,000 nowadays. Now, if it comes from 2 people, let’s say it comes from both your grandparents. They can each give you $18,000. So that’s $36,000. That gets you a lot better car. So those are the kind of things to think about in terms of gifting. The whole goal is to reduce your estate. To reduce the potential tax on your estate. We talked a little bit about the Federal tax threshold being $12,000,920, but what we haven’t mentioned is at the end of 2025, those rules expire. And the threshold goes down to $750,000. Well $750,000, if you assume that your car and your house and everything in it and any financial assets you have is part of your estate, life insurance isn’t, but basically those items. It’s not very hard to have $750,000 when you include your house. And so I don’t think it’s going to stay there. Obviously, Congress is going to step in and come out someplace and I stopped predicting Congress a long time ago. But that’s one thing to be aware of. It’s going to change the nature of estate tax today. If it’s allowed to expire, it won’t but it’s possible. So I think it’s worth a mention. 

Cassidy Clement 

So on the point of that, if somebody at least is aware that they’re going to inherit something and they have the ability to talk to the person that has named them as a beneficiary and they’re aware, as you said, there may be some policy changes in the future, what are some questions they should ask while they still have that person around? 

I know the initial thought is okay, where are the important papers and passwords? Write that down or put in a vault or tell your beneficiary. Who are the primary points of contact? Are there certain taxes to be aware of, like you had mentioned, ahead of time, because if this is some money that you actually need, kind of get an idea of what the value is actually going to be. Will receiving this inheritance impact you positively or negatively? Are there certain types of income that you need immediately? What are some of those questions they should ask or items they should ask for ahead of time? 

Nancy Nelson 

Well, you’ve heard a lot of them, but I made a little list in preparing for this. And the first thing to ask is the will. If they have one and where it is. And then the second thing is because I think these carry a wealth of information, and granted I’m a tax person, so they speak to me, is tax returns. Where are they? And you don’t need a lot of years backwards. You just need a few years back. Who’s the broker? Who’s your broker? Who do you use? Lawyer? Accountant? And if there’s a lawyer and accountant for a business. So the person may have a personal accountant or lawyer, but they may have an interest in a business accountant/lawyer. You need to know who both of them are.  

If they are a business owner and they have partners, where’s the partnership agreement? What happens when one of the partners dies or one of the owners dies? Safety deposit box. Now safety deposit boxes are very tricky and you can find very interesting things and safety deposit boxes. You can find obviously jewelry and papers and passports and card titles which you usually need if you’re going to transfer a car. House titles if there’s no mortgage on the house. Those are all things you might find in a safety deposit box. But where is it and who can sign on it? Because, and here’s an excellent example of this, if the person’s the only signer on that safety deposit box, you’re going to need a court order to get it open. And that’s a pain in the butt. Excuse the expression, but there’s no other expression for it.  

So you want to know who can sign on it, and if they’re still alive, if they’re open to adding another person to avoid that. And what often happens is that you have a husband and wife sign on safety deposit box, one dies, and the other one never thinks about it again. And so the second one dies and nobody can get into the safety deposit box. And it’s very interesting what you can find in there. Obviously you can find items of value such as jewelry, set of silver or whatever, though that’s not the most interesting place I’ve ever found a set of silver. Hidden in the radiator cover would be the answer to that.  

So those are things, when I say search the house, search the house carefully. So those are the things that you want.  

And then specific items. So in preparing for this podcast, I had a conversation with one of my friend’s daughters who’s sixteen. And I said what kind of things would you think of have value in your parents home? And she says, well, their dining room chairs. And I said why? And she says, well, they were made by some famous Shaker Maker in Ohio. And she says, but I know they’re worth money because they keep telling me that. Well, it turns out we did a little research on those chairs, and each one of those chairs is worth about $3000. There’s eight of them. Do the math. So had she not known those chairs were worth money,  what would she have done with those chairs? Just got rid of them because she hates them, by the way. But the point I’m making is, is that what’s ugly to you may not be without value. At one time in my career I helped do a state auction. And I had the privilege of doing the Gimbel Department Store estate auction for the Gimbel Estate home here in Connecticut. They had what looked to me like a picnic table down in the basement that the maids were using to fold laundry on at the estate auction. And this has been over thirty years ago, that table sold for $55,000. Which would be about $120,000 a day today. So in other words, it was a picnic table to me in the basement for laundry. What would I have done with it? Garbage. So don’t be surprised. I will also tell you if you’re to have an inventory. An inventory means two things. What they own and sometimes they’re not willing to share,  that goes back to what they’re willing to tell you. An inventory of what has value. The dining room chairs, and they may know the provenance of something that you have no idea. Again, the dining room chairs. And what they would like to go to who? So they may have a trinket of some kind or a piece of art of some kind. And they want it to go to one of their friends because they’ve always loved it. It may not have any significant value. A lot of times it doesn’t, but they want it to go there. So you need to know those kinds of things, too.  

I’ve got two final things to say besides all the important people. Who signs on what accounts? And who are the beneficiaries of some of those accounts? So retirement accounts have beneficiaries, which means who gets them when the person dies. We need to know that. It’s not undiscoverable if you don’t know. That’s actually one of the more easy things to find out. But it saves you time if you know it. And the last thing.  

You did mention this, Cassidy, is passwords. I cannot reiterate this enough. Passwords for their Apple Phone because did you know if you turn on an Apple Phone and try to give it to somebody and you don’t know the password, Apple takes six months to release the phone. Six months. even if you present the death certificate, which I learned the hard way, by the way.  

The other thing is just codes, like alarm codes, things like that. But passwords, I know someone who inherited a business and it was a technology-driven business where they developed software.  

And the business was rendered useless because she knew none of the passwords for the business. So basically a business that was generating $3 or $4 million a year went from $3 to $4 million to zero because they didn’t know the passwords. We all keep our passwords in a password keeper in our computer. Don’t have your password to your computer and I don’t have your face, so I can’t log on anymore. So how do I get to your passwords? So although it sounds very 20th century, keep a book. It sounds silly, but keep a book and update it because there’s certain passwords that you’re required to change every once in a while. And keep it up to date. I have a friend. I happen to be her executor, and every six months I get a list of her passwords. So it’s an e-mail. She just keeps a list and she sends it to me every six months. So those are the kind of things that I think are important to know. 

Cassidy Clement 

Well, this was a great conversation. I’m so glad that you touched on all these points because what I wanted to do with this was hit on the scale of I’m inheriting grandma’s pearls all the way to Uncle Joe’s farm. Hit all of the pieces because so many things people either don’t realize what it takes to inherit, don’t know that they’re going to inherit it, and sometimes it’s too late to ask those questions or prepare. So thank you so much for joining us, Nancy. 

Nancy Nelson 

Well, I want to mention the one thing about grandma’s pearls. What looks like junk to you because it’s ugly and old might be worth money. You don’t have to keep it in the state that you have it, so don’t be afraid to group up all that jewelry and take it someplace to a professional and have it evaluated. And sell it if you don’t want it. Sell it and get yourself something you want in memory of the person. Jewelry sitting in a safety deposit box, in my opinion, and I love jewelry. I have a dog named Jaja and for this generation I explain that as why you have the Kardashians today.  

That may be the ugliest piece of jewelry you’ve ever seen in your entire life, but it’s now worth $5000 and can you go out and buy yourself something nice that you would actually wear with that? And would that be more important to the person’s memory than having that piece sit in your drawer, sit in your safety deposit box for nothing? So that’s a really important thing. I am of the belief that you honor the dead by living in their memory and telling stories, because that’s the most important thing you can do. To honor them. 

Cassidy Clement 

Thanks so much for joining us.  

Nancy Nelson 

You’re welcome! 

Cassidy Clement 

So as always, listeners can learn more about an array of financial topics for free at ibkrcampus.com. Follow us on your favorite podcast network and feel free to leave us a rating or review. Thanks for listening everyone. 

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3 thoughts on “Inheritance: What to Know About Being a Beneficiary”

  • Levesque A.

    interesting. Is it possible to have the same information for Canada and Canadians inheritance?
    Also it would be useful that the writing be thicker and in BLACK because for people with not a perfect view it is very difficult to read the current thin and grey writing

  • Interactive Brokers

    Hello, we appreciate your feedback. We have passed along your suggestions to the appropriate teams!

  • Beverly

    Why no mention of stepped up basis? Beneficiaries should not encourage gifts if that would generate needless capital gains

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