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Make your inheritance work
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July 7, 2000: 2:49 p.m. ET
Tips on handling newfound assets and minimizing the headaches
By Staff Writer Jeanne Sahadi
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NEW YORK (CNNfn) - Baby boomers stand to inherit a record $10 trillion from their parents' generation. If you are lucky enough to be among them, don't be surprised if your inheritance feels like a mixed blessing.
Making smart decisions about newfound assets - not to mention their complex distribution options and tax consequences -- can feel like a second job. The money also could raise a host of emotional issues and affect your relationships with friends and family. Separately or combined, these factors can double your stress over losing a parent.
Of course, if you handle your inheritance well, you might be able to improve your life and build on your parents' hard-earned savings. To do so, however, you need to have good advisers, a clear set of priorities and a healthy respect for your vulnerability.
Uncross your emotional wires
Many people who inherit money experience feelings ranging from guilt to omnipotence. It runs the gamut from "I didn't do anything to deserve this" to "I can do anything now," said Dan Rottenberg, author of The Inheritor's Handbook.
 Either way, your emotional state can affect your decisions adversely, experts say. The guilt-ridden may let the money sit for years, passing up sound investment opportunities; and those who feel suddenly rich may squander their newfound fortune.
"People are often unable to separate out the emotional and psychological baggage that comes with the money," said certified financial planner Harry Moran of Clifton Park, N.Y.
That's why he and Rottenberg suggest you refrain from making major money decisions for at least three months to a year following the decedent's death.
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Use the time instead to park any liquid cash in a money market account, and comparison shop for a good financial or tax adviser, and maybe even a therapist.
"The therapist is no joke," Rottenberg said. "A lot of what appear to be legal or financial problems are really emotional problems."
Make what's yours, yours
But not all. To minimize potential legal and financial tangles, put a good lawyer, accountant or planner to work.
 For starters, they can help you arrange for the immediate transfer of inherited assets. Sure, money may come to you in one big check. But part of your inheritance could be a qualified retirement plan or stocks.
Let's say you inherit 500 shares of Lucent. They need to be registered in your name, but first they must be registered in the name of the decedent's estate before they can pass to you.
"They can't go directly from the deceased to the beneficiary," Moran said.
The process can take as few as three weeks, but a month to six weeks is more typical, he said.
Get savvy on distribution rules
An adviser also can help you execute your distribution decisions.
If you are the non-spousal beneficiary of an IRA, for instance, you have until Dec. 31 of the year following the decedent's death to issue instructions on how you want to receive the money, Moran said.
 Generally speaking, you have one of three options. You may receive a lump-sum payment; distributions over a five-year period; or distributions over many more years as determined by your life expectancy.
If you don't file your instructions by the Dec. 31 deadline, the account will be cashed out and the proceeds sent to you.
The same distribution options may apply if you inherit a 401(k), but you should get the Summary Plan Document from the decedent's employer to learn about the plan's specific rules regarding when you must cash out or rollover the account into an IRA.
Stay on top of taxes
There will be tax consequences to whatever decision you make.
"It's an area you want to spend a lot of time on," said certified public accountant Gary Burroughs of Portland, Ore., who noted that unless you and your parent have carefully planned for the passing of assets, taxes can eat up to 80 percent of an estate.
Tempted to take the IRA money and run? Consider what you stand to lose.
Unless you need an emergency heart transplant, "There's probably no one better off taking the lump sum," said Mike Jenko, executive director of the National Association of Financial and Estate Planning.
 You are better off keeping the money in a tax-deferred vehicle for as long as possible, since a lump-sum withdrawal will be subject to income tax, most likely at a higher bracket than your usual one since you will be getting a one-time cash infusion, Jenko said.
What's more, if you withdraw the money over a long period of time, your overall tax bite will be lower since it will be spread out more evenly and many of your later distributions may be taken when your tax bracket is lower than it is currently.
Other factors, such as whether the decedent was over the age of 70-1/2 or had begun to take distributions before his or her death, can further influence your situation.
If you inherit securities, you will need to determine their cost basis should you choose to sell them. Check with the executor of the estate. He will either value the securities at the date of the decedent's death, or possibly several months after the death, depending on whatever is most advantageous to the estate.
Invest wisely
Once you've gotten the initial decisions out of the way, it's time to reassess your financial goals and decide how best to put your inheritance to work.
If you're the beneficiary of stocks, bonds or funds, you need to decide if they fit into your overall portfolio. Some people have a sentimental attachment to certain securities, Moran said. But they don't always make the best investments. What's more, they may leave you with a very unbalanced portfolio that lacks diversification.
 Or perhaps you will be tempted to pay off your debt in one fell swoop.
"People always like to have the feeling they don't have any debt," Moran said. But, he added, "you have to get comfortable with the idea of good debt and bad debt."
You would do well to clear your high-interest debt, such as your credit card, he suggested. But think twice before paying off your low-interest mortgage. It could be that investing your money will bring you a greater return than buying off the last blade of grass on your property.
Protect your taxable money
Should you receive your inheritance in cold cash, consider investing in tax-efficient mutual funds or those that deliver the best after-tax returns, Moran said. That's because you will not be able to shelter much of it in tax-deferred vehicles such as an IRA, since there is a $2,000 cap on yearly contributions.
You might also bump up your 401(k) contributions at work, since you will have some extra money in your bank account to cover any decline in your net pay, said CFP Frank Joy of Las Vegas.
Dream a little
Although managing an inheritance involves a lot of detail work, you should also set time aside to dream of new possibilities, especially if you've come into a life-altering amount of money.
That doesn't necessarily mean millions. Depending on your lifestyle and the cost of living where you call home, a few hundred thousand dollars invested well can allow you to become a full-time writer, for instance, as was the case for one of Moran's clients.
Equally important, experts say, is to indulge a little. As Moran put it, "It's OK to take a small portion of the money and have some fun." 
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