Inheriting money or property can be a mixed blessing. Only a few states impose inheritance tax, and the estate, not you, pays any estate tax. If you inherit a retirement account or a house, however, there are taxes and other expenses you have to deal with. Inheritance can also cause personal and family stresses you may not want to deal with.
Inheriting a House
Death doesn't wipe out mortgages. If you inherit someone's home, you can't keep it unless you move in and keep up the mortgage. Otherwise, the mortgage company can call the mortgage due immediately. Keeping the house also requires you to pay property taxes and insurance. If it's an older home or run down, the cost of remodeling may be more than you can afford. Selling the house eliminates the problems of ownership, but you may have to settle for less than the house is worth.
Individual retirement accounts work differently for spouses than other people. If you inherit an IRA from your spouse, you can treat it as your own account, not withdrawing money until retirement. If you're any other heir, you have to start withdrawing money within a year and report it as taxable income. With a Roth IRA, it's possible the money won't be taxable. A 401(k) plan can require you take the money out in a lump sum, even if that pushes you into a higher tax bracket.
Sometimes parents can't decide who should inherit their assets. Making siblings share equally -- 50 percent of the bank account, 50 percent ownership of the house -- is simpler for parents but tougher on the kids. For example, one sibling might want to live in the house while the other wants to sell. A mother who divides her jewelry equally between two sisters can set them fighting over who gets which piece.The problems are solvable, but funerals sometimes bring out the worst in people and turn the discussions ugly.
Like winning the lottery, a big inheritance can turn an heir's life upside down. If the heir already has problems with compulsive shopping or drugs, he may find his problems even harder to rein in. Some heirs have no idea how to manage a large sum of money or how far it can go. They end up spending more on a house or an expensive car than they can really afford, or make bad investment decisions.
- Nolo: Inheritance Tax
- HouseLogic: I Just Inherited a House. Now What?
- Internal Revenue Service: Individual Retirement Arrangements
- 401k Help Center: Tax Issues When You Inherit a 401k
- Washington Post: When Siblings Squabble Over an Inherited Home
- Bankrate: Seven Money Afflictions From Inherited Wealth
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.