Sizeable Inheritance Guidance?

[gardenstash]

Sadly a close family member passed away somewhat unexpectedly. I am the executor of the estate and am dealing with two other parties (a sibling and the spouse of the family member).

The value of the estate is approx $1.2 million. I'm a bit shocked by the amount. The largest portion of the this is in a Fidelity account that is 45% bonds, and 55% stocks and short term investments. Since the recent stock market shenanigans, the Fidelity account has lost approx. $60,000 in value.

The way the assets are supposed to be allocated is the bulk is to be split between myself and my sibling. The spouse is using a law the family member was not aware of to assert a claim of 30%-50% of estate or probate. Lawyers are involved.

I can't change the allocation of the Fidelity investments and I have no concept of the time table on when the estate will be sorted out.

The range of money I stand to receive depending on what is played out with lawyers is anywhere from $500,000 (highest) - $330,000 (medium) - $276,000 (lowest possible I think I'd get). This could change based on how the stock market behaves over the coming months as I navigate through the process of handling the estate.

I have very little debt beyond a reasonable mortgage and car payment that are both at very low interest rates. I am self-employed earning between $75,000-$110,000 depending on the year with a spouse that earns about $48,000. I'm 37, my spouse is 41. I have two rental/investment properties which are the bulk of my retirement "savings" at the moment. I don't have much put away in a 401k or other retirement vehicle.

My ultimate goal with what I receive is to fund my own retirement and keep a little aside for a nice vacation and some funds for my child care expenses as my income is down right now with the economical madness swirling about but I'm sure will recover eventually once this madness dies down. I would like to just keep the portion of the Fidelity stocks that I end up receiving in their current setup and just let that ride. However I don't know what the best way to proceed with receiving a lump sum like this. Is there a benefit to speaking with a certain type of financial advisor? Is there any general guidance that can be recommended by this forum on making the most of the inheritance?

I don't really anticipate retiring super early, and I don't live frugally or especially simply. I work for myself and even if I didn't do what I do now, I'd want to have some type of job/business I own that would make an income of a minimum of $50,000/year even later in life. I also love real estate (specifically the design and rehab of properties) and have experience managing properties and tenants.

[bwall]

Is there a benefit to speaking with a certain type of financial advisor? Is there any general guidance that can be recommended by this forum on making the most of the inheritance?

First off, my condolences for your lost loved one.

You've provided a lot of information and I'll only speak to the two comments above;  answering the second question first: you'll get lots of opinions and good ideas on these boards. I'm always learning something here and I'll let the others with more experience in estates,  inheritances and lump sum investments chime in.

As far as the first question: Everyone's needs and abilities are different. If you are literate, enjoy having money in your pocket and even a passing interest in your own financial welfare, then I would not suggest using a financial advisor. You can get all the information you need here.
If you have too much money already and are happy to share it with strangers for no real good reason, then by all means hire a financial advisor.
If you enjoy being talked down to by people who have less money than you but are specialized in fancy words that might be new to you, then a financial advisor might be just what you're looking for.
If you're easily impressed by expensive clothes, fancy watches, luxury cars and overseas vacations then spending time with a financial advisor might fulfill unmet childhood needs.
I think you get the idea of my opinion of financial advisors.

[GizmoTX]

My sympathies for your loss & executor burden.

I'm surprised that the spouse was omitted from the estate. No wonder lawyers are involved. One of your jobs is to control how much gets spent on said lawyers; unless there's a very good reason to exclude the spouse, better that s/he gets what the lawyers will siphon off, especially over time.

Whatever you inherit will be transferred to a new account with the new cost basis, i.e. the valuation at the time of death. You are then free to structure your allocation however you want; you are not limited to the current investments or even Fidelity. I personally would look for a trusted high yield savings fund such as Schwab offers which allows time to decide how to invest.

[secondcor521]

My condolences.

You probably don't need an advisor, even with that amount of money.

Consider mediation with the spouse asserting the claim; it will be faster, and may overall be better than dragging things out in court.

For general thoughts, I'd suggest reading through https://www.bogleheads.org/wiki/Managing_a_windfall.

[gardenstash]

My sympathies for your loss & executor burden.

I'm surprised that the spouse was omitted from the estate. No wonder lawyers are involved. One of your jobs is to control how much gets spent on said lawyers; unless there's a very good reason to exclude the spouse, better that s/he gets what the lawyers will siphon off, especially over time.

Whatever you inherit will be transferred to a new account with the new cost basis, i.e. the valuation at the time of death. You are then free to structure your allocation however you want; you are not limited to the current investments or even Fidelity. I personally would look for a trusted high yield savings fund such as Schwab offers which allows time to decide how to invest.

The spouse wasn't completely omitted, there were specific assets left to them, just much smaller than what was left to me and my sibling. This is this family member's fourth marriage. They've only been married for two years. Finances were not co-mingled. This family member is a very unusual person, and very weird with money. The intention with the assets was never a secret between them, the spouse was well aware of the will and never seemed to have a problem with it until after the death. No all the sudden they want to use the law this family member was unaware of for spousal claim (the family member thought the will was setup to follow-through with their intentions) to maximize what they can get from the estate. This family member was not one to get the input of lawyers so this is why they were not aware that being married might conflict with what had been setup with the will and why they didn't get a pre-nup. However, all three of us were well-informed about the deceased intentions for their estate.

Can you elaborate what you mean by wiill be transferred to a new account with the valuation at the time of death? The assets are still in the stock market so I would assume I'd only get the value of the stocks when they are officially handed over to me. I don't think they get frozen in time at the value they were when this family member passed away?

[secondcor521]

Can you elaborate what you mean by wiill be transferred to a new account with the valuation at the time of death? The assets are still in the stock market so I would assume I'd only get the value of the stocks when they are officially handed over to me. I don't think they get frozen in time at the value they were when this family member passed away?

I'm not @GizmoTX, but the answer is that your basis in those assets is stepped up to the value as of the date of death of the original owner.  If you later receive those assets (after whatever court battle is resolved) and if you choose to sell those assets, your taxes will be calculated on the difference between that basis as of date of death and whatever you sell them for.  Also, regardless of when that happens, because the assets were inherited, you can claim a long term capital gain or loss when you sell.

Also, for what it's worth, there is an alternative valuation date of six months after the original owner's date of death, which you can use under certain circumstances.  I'm not sure exactly what those circumstances are; I believe everyone has to agree to use the alternative valuation date and it would be for all assets inherited; you can't individually pick and choose.

[gardenstash]

My condolences.

You probably don't need an advisor, even with that amount of money.

Consider mediation with the spouse asserting the claim; it will be faster, and may overall be better than dragging things out in court.

For general thoughts, I'd suggest reading through https://www.bogleheads.org/wiki/Managing_a_windfall.

Thanks for sharing the Bogleheads wiki, I'll definitely check that out. I do not think the spouse will consider mediation though that would absolutely be my preference. I had already told them that I wanted to make sure they received more than had been stipulated in the will and we didn't need to get lawyers involved but that fell on deaf ears. I think they're just out to get as much as is legally possible despite knowing that is NOT what my family member wanted. The response by the spouse has been a complete shock to me. I know people always say that the aftermath of a loved one's passing when it comes to dealing with an estate brings out the worse in people but I was not prepared for how fast and how aggressive it happened, it is not in keeping with my previous perception of this person at all. I did write this in another response, but this is my family members fourth marriage and it's only two years old, with several years of dating previous, so about 6 year total relationship. They did not have co-mingled finances.

[gardenstash]

Can you elaborate what you mean by wiill be transferred to a new account with the valuation at the time of death? The assets are still in the stock market so I would assume I'd only get the value of the stocks when they are officially handed over to me. I don't think they get frozen in time at the value they were when this family member passed away?

I'm not @GizmoTX, but the answer is that your basis in those assets is stepped up to the value as of the date of death of the original owner.  If you later receive those assets (after whatever court battle is resolved) and if you choose to sell those assets, your taxes will be calculated on the difference between that basis as of date of death and whatever you sell them for.  Also, regardless of when that happens, because the assets were inherited, you can claim a long term capital gain or loss when you sell.

Also, for what it's worth, there is an alternative valuation date of six months after the original owner's date of death, which you can use under certain circumstances.  I'm not sure exactly what those circumstances are; I believe everyone has to agree to use the alternative valuation date and it would be for all assets inherited; you can't individually pick and choose.

I think it would be preferable (by me) to use the valuation at six months from date of the original owner's death, so I'll have to ask the attorney about that. Based on the cancellation of in person court proceedings in my area due to coronavirus I can see this taking a while even if my preference would be to resolve it earlier.

I don't understand what tax liability there is on these assets as well. That's something I'd like help understanding, but I don't know who I would go to to get details on that. A CPA? I was under the impression due to the value of the estate and where I live there were no federal or state taxes I'd have to pay on the inheritance and no taxes the estate would have to pay.

[secondcor521]

I think it would be preferable (by me) to use the valuation at six months from date of the original owner's death, so I'll have to ask the attorney about that. Based on the cancellation of in person court proceedings in my area due to coronavirus I can see this taking a while even if my preference would be to resolve it earlier.

I don't understand what tax liability there is on these assets as well. That's something I'd like help understanding, but I don't know who I would go to to get details on that. A CPA? I was under the impression due to the value of the estate and where I live there were no federal or state taxes I'd have to pay on the inheritance and no taxes the estate would have to pay.

You'd hope the executor will pick the date which has the higher value, although it could be a trade-off between state estate taxes now and capital gains taxes later.  You'd have to do the math.

You can learn a lot just by asking here.  A CPA or EA who is local to you and recommended by people you trust should be able to give you proper advice but you will be shocked at the price tag.  As a data point, the one guy I would trust to give me tax advice locally charges $250 per hour to answer questions.  Usually that's enough of an impediment for me to go figure things out on my own.  Another strategy to consider is to figure out as much as you can on your own and then go to a CPA or EA to get answers to the questions you still have - this way, you'll be able to understand their answer better as well.

Roughly speaking:

1.  If the original owner's assets earn more than $600 between the original owner's death and the distribution to the heirs, then the executor is obligated to file a federal estate tax return (see IRS Form 1041, which is sort of like a 1040 but it's for estates and trusts).  The estate's earnings will be subject to income taxes just like a regular person, except the brackets and rates are much more aggressive, and there are a number of other rule differences.

2.  The estate sounds like it won't be subject to federal estate taxes.  Depending on which state the original owner was a resident of, the estate may or may not be subject to estate/death/inheritance taxes.  You can google the relevant state's laws.  I like nolo.com as a resource here.

3.  After you receive the assets:

a.  If they were in taxable accounts (sounds like it), then when you go to sell those assets, whenever that may be, then you'll pay capital gains taxes on the difference between the sales price and your cost basis.  Your cost basis will be the value of the asset as of the valuation date.  The valuation date will either be the date of death or 6 months later, as mentioned earlier.  You'll receive a 1099-B from the brokerage firm in the spring after you make the sale, just like normal.  You may have to determine the cost basis.

b.  After the assets are transferred to you, you'll owe income taxes on any dividends or interest you receive, just like normal.  You can expect a 1099-INT or 1099-DIV from the brokerage firm holding the assets, again as normal.

c.  If the assets you inherit were inside retirement accounts, such as an IRA, 401(k), or other such investment, then there are other rules, but broadly speaking (a) you may be required to take annual distributions, and (b) those annual distributions will probably be taxed as ordinary income, like you just got paid more at your job.

[gardenstash]

c.  If the assets you inherit were inside retirement accounts, such as an IRA, 401(k), or other such investment, then there are other rules, but broadly speaking (a) you may be required to take annual distributions, and (b) those annual distributions will probably be taxed as ordinary income, like you just got paid more at your job.

Everything you shared was extremely helpful, thank you very much. I didn't realize specifically about C. I was assuming (based on nothing) that I would just be able to sell the stocks in the 401k and IRA and do whatever I wanted to with that money. I wouldn't have even known to ask questions about the different items you shared with me. Is there a good website or resource you can point me to to educate myself further. I'm really good at research and understanding things, but I've never considered anything inheritance wise before so I'm starting with very little knowledge.

[secondcor521]

c.  If the assets you inherit were inside retirement accounts, such as an IRA, 401(k), or other such investment, then there are other rules, but broadly speaking (a) you may be required to take annual distributions, and (b) those annual distributions will probably be taxed as ordinary income, like you just got paid more at your job.

Everything you shared was extremely helpful, thank you very much. I didn't realize specifically about C. I was assuming (based on nothing) that I would just be able to sell the stocks in the 401k and IRA and do whatever I wanted to with that money. I wouldn't have even known to ask questions about the different items you shared with me. Is there a good website or resource you can point me to to educate myself further. I'm really good at research and understanding things, but I've never considered anything inheritance wise before so I'm starting with very little knowledge.

You're welcome.

Assuming, in general, is not a good thing.  It can be especially damaging when dealing with inheritances, taxes, and legal matters.  I encourage you to go slowly and only take action once you are fully certain that you understand the implications of your actions.

Just like in your own 401(k) or IRA, you can certainly sell and buy assets as you see fit (after you receive the assets) inside the account generally with no tax consequence.  Although, you should read up on wash sale rules, as those may affect you.

However, withdrawing money from the 401(k) or IRA will, again very generally speaking, result in that withdrawal being taxable to you at ordinary income tax rates in the year in which you make the withdrawal.

I've accumulated what I know over decades of reading various websites.  Many websites are approximately correct but not exactly correct.  I would encourage you to go to the gold standard sources for information, which are the actual federal and state laws, and the IRS website, including their forms and publications.  They are often thick reading, but if you like to research and have a reasonable intellect, they are frequently reasonably understandable.

As a start, you could read up on federal estate taxes on the IRS website.  It probably has a publication about that.  Try this link, which is the kind of search I frequently do:

https://www.google.com/search?q=estate+taxes+site:irs.gov

If you choose to research using other more readable websites, I would encourage you to find ways to evaluate the quality of the source before relying on anything they say.  There are sites I trust based on this approach but I wouldn't want you to substitute my experience and judgment for your own.

Finally, as mentioned before, I think it is a reasonable strategy to read as much as you can for free, and then go to a reliable, local, expert in your area with your advanced questions.  I personally would want someone who is fee-based, fiduciary, recommended, and has appropriate certifications - for me that is a partner in a local, highly regarded CPA firm who focuses on taxes.

On this last note, you'll need to develop enough of an understanding to know the difference between legal issues and tax issues and hybrid issues that span both areas.  In your situation, you've probably got questions and need to learn about both areas, and it would be good for you to be able to figure out which expert(s) to go to with which questions.