Hodges University

In my decades of working with clients, I can think of no other topic that brings out a broader range of emotions than inherited assets. Why? Probably due to the fact that they are not the result of the beneficiary’s hard work, but that of their parents, grandparents, or other family members, and the emotional relationship with those assets are just, shall we say, highly divergent. Sometimes we end up compartmentalizing money, because why wouldn’t we? We’ve been conditioned our entire lives to compartmentalize our money with various accounts and associated balances: 401K, Individual Account, Roth IRA, Joint Account, etc.

An inheritance is yet another sum of money inside of an account(s), so our mental accounting treats it as such. I remember a couple instances where clients told me the following. While pointing at a manila envelope, he proclaimed that “these are our (the spouses) accounts, and we like your investment proposal for them, but these (pointing to another folder) contain my inheritance, and I just can’t screw these up.” There were just some deep emotional ties to that pool of money that made these folks overthink the actual situation.

Well, what is a rational way to view the situation? Well, for starters, when I talk with newly retired clients, their wishes are usually to map out a retirement income that is comfortable and sustainable. Anything that is left over is typically for the benefit of their extended family or charities. So, when you, as the beneficiary, receive that inheritance, it was probably at the wishes of your relatives. Perhaps taking comfort in the fact that this was the original intent would ease some of the emotions around the inheritance? Furthermore, if your relative’s strategy was to prudently invest to carve out their necessary lifestyle, then you can continue in like spirt and carve out your lifestyle and investment goals. If your needs from the inheritance are not too onerous, you can invest for your future beneficiaries. This is how one can build multigenerational wealth.

By embracing what has so graciously been bestowed upon you, you might be able to reshape parts of your financial life for the better. You could use proceeds to pay down outstanding debts, or even a mortgage so that you can own your home free and clear. If your finances are well in order, you could use proceeds for gifting to children or grandchildren. You could start to fund 529 College Savings Plans. The key point is that you will have many options to put the inheritance to good use.

Here are some items to remember. Consulting with your CPA or attorney is a must because there are always legal or tax intricacies that seem to be forever changing.

Real Estate:

It is important to get an appraisal of all properties to establish a new market value. Your accountant will need this for figuring out the stepped-up basis and potential new tax base.

Marketable Securities in Taxable Accounts:

If you will be inheriting a taxable account (Trust or Individual) containing individual stocks, mutual funds, exchange traded funds (ETFs), MLPs…any security that is tradable on an exchange. Knowing the cost basis and date of purchase for all securities is very important. It is something that will be necessary for understanding potential capital gains. The advisor of record should have these available.

Marketable Securities in Tax Deferred Accounts:

If you will be inheriting a relative’s Individual Retirement Account (IRA), there are certain withdrawal requirements and taxable situations of which you need to be aware. The laws around taxation and withdrawal timelines for these types of accounts have tended to change over the years, so contact your CPA or attorney to gain a better understanding of the current laws.

If you inherit a Roth IRA, as mentioned above, brush up on the current withdrawal timeline and any potential associated tax issues.

Private Stock Ownership:

If you heirs had an investment in a private company, they would have been issued some sort of document displaying their ownership interest and a capitalization table (Cap Table) listing all the other parties involved. Again, having a CPA or attorney review the document is the best course of action.

As your inheritance comes your way, embrace the legacy. Use it wisely to benefit your life and the lives of your next of kin.

Hodges Private Client is a program offered through Hodges Capital Management, Inc. (“HCM”).  HCM is an Investment Advisory Firm registered with the Securities and Exchange Commission (“SEC”), is a wholly owned subsidiary of Hodges Capital Holdings and serves as investment advisor to the Hodges Funds.  HCM is affiliated with First Dallas Securities, Inc, a broker-dealer and investment advisor registered with the SEC.

This discussion is not intended to be a forecast of future events and should not be considered a recommendation to buy or sell any security. Past performance is not indicative of future results. Investing involves risk. Principal loss is possible. Investing in smaller companies involves additional risks such as limited liquidity and greater volatility. No current or prospective client should assume that information referenced in this communication is a recommendation to buy or sell any security or is a substitute for personalized investment advice from your individual advisor. HCM does not provide tax or legal advice. Consult your tax or legal advisor for any related questions.  

All information referenced herein is from sources believed to be reliable and is provided as general market commentary and does not constitute investment advice. This material was created for informational purposes only and the opinions expressed are solely those of HCM.  HCM shall not in any way be liable for claims and makes no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information.  The data and information are provided as of the date referenced and are subject to change without notice.