Most people dream of finding out a rich aunt has left them money. Others plan on inheriting money from parents or grandparents. In most cases, an inheritance can be a positive event in your life. However, even in cases where things eventually work out, you can run into multiple problems that can make the process of getting the money a nightmare.
Understanding some of the disadvantages of inheritances will help you prepare for a variety of scenarios.
Legal Challenges Can Arise
Depending on who left you the money, you might have to fight off other claimants. This can include spurned exes, children, your brothers and sisters, cousins, business partners and a variety of others who believe they should receive all or part of the money.
Even if you ultimately win any challenges, the process can cost you thousands of dollars and delay your receiving your money. Even in uncontested inheritances, the paperwork and taxes can take months or years to finalize. If you face legal challenges, you won’t even be able to start the paperwork until a judge decides who gets the money.
Lots of Paperwork to Complete
Even if one person leaves another person all of his or her money with no challenges from anyone else, there still might be a complicated process of searching tax records, property ownership and other issues. In the case of an uncontested will, a probate court might still need to review asset records. Even after you submit all of your paperwork, you might need to wait until the court has time to schedule your hearing for final approval. If the court is busy, you could wait months.
If a family member dies with no will, you might still be legally entitled to inherit his or her assets, but you’ll have more paperwork to prove you are a legal heir. If someone dies with a will but no executor, that can add to your workload. Even if you work things out in advance with a family member who writes a will, names you executor of the estate and gives you power of attorney, there is still lots to do.
You Might Have Liabilities
If you inherit property or a business, you aren’t liable for their debts or taxes if you don’t want the property. However, if you do, you’ll need to make sure all claims are satisfied. For example, if you inherit a house with a mortgage on it, you’ll need to take care of the mortgage. If you agree to accept a business, you will not only get its assets, but you’ll have to pay any creditors, taxes, fines or other claims.
When someone leaves you an inheritance, they can’t stick you with liabilities if you don’t want them. It’s only if you agree to accept the inheritance that you now accept the liabilities.
It Can Destroy Relationships
If a parent leaves you money and not your sibling, or if a family member leaves you more than other family members, this can cause hard feelings. If your family members challenge you legally, that can end a relationship. As part of their case, they might accuse you of fraud or at least taking advantage of and manipulating the deceased person.
If you are the executor of a parent’s or grandparent’s will, your family members might question the way you are handling the estate. For example, if the IRS is conducting an investigation into how much taxes the heirs might owe, this could take months or more than a year.
If your siblings don’t want to wait that long, they might sue you for their share now. If you give them their share and the IRS comes back and says you owe taxes, you might get stuck with that tax bill if your siblings don’t agree to pay up.
If you are placed in charge of selling a relative’s house, your siblings or cousins might want you to dump it for a quick sale, while you want to fix it up and get the maximum sale price. On the other hand, you might want to sell the house as-is, while your siblings might want everyone to put in $10,000 to fix it up and maximize the sale price. These types of issues can destroy families and friends.
Steve Milano has written more than 1,000 pieces of personal finance and frugal living articles for dozens of websites, including Motley Fool, Zacks, Bankrate, Quickbooks, SmartyCents, Knew Money, Don't Waste Your Money and Credit Card Ideas, as well as his own websites.