Learning that you inherited money comes with complicated emotions as it is. When a lawyer presents you with a binder full of trust documents as you grieve the loss a loved one, it can cause frustration and confusion to skyrocket.
It is preferable to have these conversations while your loved ones are still living, so you are prepared. If that isn’t, the case, however, here are a few steps you can take to get caught up to speed.
Get To Know Your Team
Often, a trust will have (or should have) multiple professionals involved to help ensure it is managed properly. It is prudent for the beneficiary to meet with various members of the team to get your questions answered.
- Trustee: The Trustee is charged with making sure the inherited trust is executed in accordance with your loved one’s wishes. A lawyer, CPA, trusted friend or family member could serve as the Trustee. A corporate trustee, such as a bank or trust company, is also an option.
- Investment Advisor: No matter the size of the inheritance, it may be prudent to retain an investment advisor to help manage the assets. If the assets are to remain in the trust, professional oversight of the trust’s investments is likely required. The job of the investment advisor is to make sure the assets are invested appropriately, in accordance with both the terms of the trust and/or the goals of the beneficiaries.
- Tax Advisor: Trusts have nuanced tax rules for both the trust itself and for beneficiaries. A professional tax advisor can help you understand your tax exposure after you inherit a trust, if any, and how to limit it over time.
Learn About Distribution Restrictions On The Inherited Trust
When you inherit a trust, there are sometimes restrictions on your ability to withdraw funds. Gaining a thorough understanding of these restrictions through consultation with your team can help you better plan for the future.
For example, there may be an age restriction on the inherited trust which only allows distributions after a beneficiary reaches a certain age. Or there may be an interest designation, which allows beneficiaries only to withdraw interest from the trust, leaving the principal intact for future generations.
Another common restriction is the so-called “HEMS” standard, which stands for health, education, maintenance and support. In this case, the trustee must approve expenses that qualify with the HEMS criteria.
Understand The Trust's Investment Policy
If you have an investment advisor overseeing the trust’s portfolio, it is important for you to understand the investment plan. Depending on the terms of the inherited trust, you may or may not have the ability to alter the investment plan. Even if you can’t change the way the assets in the trust are invested, it is still worth understanding. You want to consider the way those assets are invested in the context of your broader portfolio and financial plan. For example, it may be prudent to adjust your risk tolerance elsewhere, such as your 401k or other investment accounts.
The complex emotions of losing a loved one and inheriting a trust can feel overwhelming. Instantly gaining more wealth through inheritance can bring on both additional security and new fears.
We believe the biggest mistake you can make in this scenario is to rush your decisions. Instead, take a step back, ask plenty of questions, and evaluate your options. An important consideration is how you want this newfound wealth to impact your life. An inherited trust may, for example, help ensure your own retirement, allow you to give back to your community, or consider future generations through ongoing estate planning.
If you have questions about trusts or other estate topics, please schedule a complimentary consultation with one of our advisors.