Are You Expecting to Inherit? Consider These Factors

If you’re lucky enough to inherit assets, the amount you receive may be less than expected, depending on taxes and other factors.

An estate tax may be leveled at both federal and state levels. At the federal level, the 2015 exemption is $5,430,000, so you won’t owe any federal estate taxes if the deceased’s estate is less than this.

Only a handful of states collect estate taxes (and the state that applies is the one in which the deceased lived or owned property, not your state). As with federal taxes, there’s an exemption level that varies by state.

There’s also an inheritance tax. Chances are this may not apply, because only six states collect it: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. In all of these states, property passing to a surviving spouse is exempt, and in most of them, the same is true when passing property to children and grandchildren.

In general, an inheritance is not considered income, so you won’t have to report it on your income tax return. But there are other costs to consider. For example, if someone leaves you a house, you may want to sell it, which will involve real estate agent fees. If you inherit stocks, you’ll have to pay a brokerage commission to sell them. And if you inherit an IRA, you’ll have to pay tax on the distribution just as the deceased would have.

The latter, especially, can get complex, so it’s a good idea to talk to your advisor if an inheritance is a possibility.

Don’t Panic: How to Manage Market Declines

Many of today’s investors are uncomfortable in a declining market. But declining markets aren’t unusual: According to Ned Davis Research Inc., which analyzed years of Dow Jones Industrial Average data, dips (declines of greater than 5%) occur 127 times every 50 years; moderate corrections (greater than 10%) occur 33 times; and severe corrections (greater than 15%) occur 16 times. Bear markets (greater than 20%) occur nine times in a 50-year span.

Make it personal

Market declines are unlikely to be a problem for long-term investors, as markets typically recover after a downturn. But even if you’re a short-term investor, a market decline won’t necessarily affect you. The market may be down, but that doesn’t mean your personal holdings have dropped as well; the only share prices that should matter to you are the prices of shares you own.

So when the market declines, before you panic, look at your holdings. When did you purchase them? At what price? What is the current share price? When do you really need the money? Does the gain or loss you’ve experienced on your overall portfolio allow you to meet your goals, given your investment time horizon?

Minimize the downs

You may also want to consider some proactive steps to minimize the impact of market declines on your portfolio. You can invest in a variety of mutual funds to spread around your risk through many vehicles, including dozens or even hundreds of stocks, domestic and international funds, small-capitalization and large-capitalization investments, and more.

You also can invest in companies that pay dividends or interest, cushioning downturns with investment income. And you can dollar-cost average (make smaller investments at regular intervals over a period of time, which allows you to purchase more shares when prices are low) instead of making a single large investment.

Discuss this with your advisor; he or she may have more suggestions.