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Should you sell (or even refuse) inherited assets?

Investment and Asset Management

An inheritance can provide a welcome windfall, especially if you’re planning for retirement. But don’t automatically assume you should hold onto valuable assets you inherit. In many cases, disposing of them or even turning down an inheritance altogether (really!) may make more financial sense.

Essential Questions

  • If you receive an inheritance, it’s important to evaluate the asset (or assets) to determine how it might fit into your overall financial and retirement plan. Questions to ask include:
  • What’s the asset worth?
  • How important is it to keep the asset? For example, is there any sentimental value?
  • If you keep the asset, does it fit into your overall asset allocation strategy? Or, if you hadn’t inherited the asset, would you have purchased it?
  • Does the asset generate income?
  • What liabilities, expenses or time commitment are associated with managing or maintaining the asset?
  • What’s your comfort level with the asset’s inherent risks?
  • If you were to sell the asset, what would you net in after-tax proceeds? Inherited assets generally are entitled to a stepped-up cost basis, which can minimize or eliminate capital gains taxes.

Often, individuals are better off selling inherited assets and using the proceeds to fund retirement in a more efficient, lower-risk manner. Say you inherit a small office building that’s worth $2 million and has a cost basis of $500,000. There’s no mortgage, but the building is struggling to find tenants and its property taxes, insurance and maintenance expenses are $75,000 per year. Rather than invest $75,000 per year in a building with an uncertain future, you may be better off taking advantage of the stepped-up basis to sell the property tax-free and using the proceeds to invest in other assets.

Turning It Down

In some cases, the best strategy is to reject an inheritance altogether, using a qualified disclaimer. Suppose, for example, that you inherit an IRA from a parent. Distributions from the IRA, which generally must now be taken within 10 years, may generate significant income taxes. 

Now, assume that your child (your parent’s grandchild) is the contingent beneficiary. If you turn down the inheritance, the IRA will go to your child. Assuming your child is in a lower tax bracket, this will produce significant tax savings for your family. For help with this or other inheritance issues, contact your Lenox Advisor.