Let’s start with the numbers: 10 and 1,000,000,000,000.
Over this decade, $1 trillion is expected to change hands through inheritance. The majority of that will end up in the hands of baby boomers. And while one study found that the average inheritance was only $50,000, there will be a lot of inheritances in the $1 million-plus range.
That is serious money, folks. If you live in Texas and one of the fortunate who end up receiving this gift, there are several things you should keep in mind.
First, Texas is a community property state. If you are married, then your inheritance is separate property. It will stay separate property so long as you do not commingle it with community funds or gift it to your spouse. This is much harder to do than it looks.
The obvious solution is for you and your spouse to enter into a written marital agreement that spells out that your inheritance, together with any income from it, remains your separate property. You then have to be careful that you truly keep it segregated from your community property.
If your spouse is not willing to enter into a marital agreement, then you need to go to plan B. Talk to an attorney about what assets in your inheritance can safely be put into a trust. If you go this route, then you should still take precautions to track income and keep it separate.
Plan C is to put your inheritance into assets held in only your name, and segregate the income from them. This is important because income from separate property is considered community property.
The second tip is about the overall management of the inheritance. You should analyze it by type of asset. IRAs and other qualified funds take very special handling to ensure that you do not get hit with taxes or penalties. If you immediately cash out your inherited traditional IRA, then you are going to lose a good chunk of it in taxes. Similarly, if you fail to take the mandatory distribution of a Roth IRA, you are going to have to pay a steep penalty.
Inherited real estate poses its own problems. If you by chance inherited only a portion of a piece of real property, then you will have to work with the other owners regarding use, maintenance and/or sale. You may even have to file a partition suit to force a sale if your co-owners are not cooperative. Real estate may be encumbered by an environmental issue, a mortgage or a delinquent tax.
Then there are the live assets: dogs, cats, horses and such. You will need to take possession and decide if you are keeping, selling or putting them down.
Some assets are just a pain to deal with. These include timeshares, partnership or entity interests that do not have a buy-sell agreement, and Title II weapons.
The third tip is to remember the disclaimer. This is a procedure where you just refuse to take part or all of an inheritance.
Final tip: Talk to your lawyer, CPA and financial adviser. Incorporate your inheritance into your own estate plan. Don’t blow it in the first two years.