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Making most of inheritance possible with planning


If you`re in line for an inheritance, you`ll find that there are more important issues to consider than the make and model if the new car you want to purchase. How you invest the money and plan for taxes can play an important role in securing your financial future.

Guarding your inheritance

Avoid short-term financial commitments. There is a good chance that you won`t receive your inheritance immediately. Administering and settling an estate is very complicated and requires significant time, so don`t commit to any financial obligations until you know exactly when the funds will be dispersed and how much you will actually receive.

Don`t make long-term financial decisions while you`re in an emotional state of mind. The loss of a loved one can be very traumatic. If you are experiencing strong emotions over the loss, it may not be the best time to make difficult financial decisions. It is best to delay making long-term investments until after you have recovered emotionally. For the short-term, it may make sense to place your money in an account where it is readily accessible and where you can earn a reasonable rate of return.

Face the reality of estate taxes. Your inheritance may be subject to federal, state, and/or local taxes, which will reduce the amount you actually receive. Up until 1997 the first $600,000 of property and assets would pass to heirs estate tax free. Thanks to the Taxpayer Relief Act of 1997, this amount will be gradually increased until the exemption reaches $1 million in 2006.

Develop an investment strategy. As you do with the money you earn, you`ll want to develop a strategy for investing your inheritance. That way you can choose investments that help you reach your goals and are compatible with your tolerance for risk. A financial plan can help you chart a course and determine the appropriate investments once you decide what you want your money to do.

If you inherit assets that are already invested, evaluate each one the same way you would a prospective investment. If the asset fits your needs and meets your criteria, it makes sense to hang on to it. Don`t keep an inherited asset simply because it was purchased by the person from whom you inherited it. Everyone has different needs and circumstances, and the right investment for him or her may not be best for you.

Understand how taxes will affect your investment return. Investment earnings on your inheritance will be subject to federal income taxes unless you choose tax-exempt investments. But it`s important to look at your entire financial picture and not choose investments based on their tax status alone. For example, municipal bonds may be a better choice than taxable bonds for investors in the 31% and above tax brackets even though munis` stated yields are likely to look somewhat lower than yields on taxable investments at first glance.

On the other hand, since stocks have historically outperformed other investments over the long-term, you could be potentially better off paying the taxes on stock gains in return for greater growth potential – if you have the luxury of a long time horizon.

Either way, it`s important to look beyond the surface and consider what you actually get to keep after taxes when choosing an investment.

Look for help. Avoid making quick decisions regarding your inheritance. Most importantly, don`t feel like you have to make these important decisions alone.

Gary N. Garner is a personal financial advisor with American Express Financial Advisors in Jackson.


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