When a loved one passes away and leaves an inheritance, a person can get an average of $46,000 from the will. But receiving that money is not the end — one needs to have a game plan to protect and invest it.

Estate planning attorney Philip J. Ruce from Stone Arch Law returns to KSTP to talk about everything people need to know about inheritances and the wisest ways to spend and protect them.

Key Discussion Points

First Thing to Do After Receiving an Inheritance

When someone passes away and leaves an inheritance, their beneficiaries don’t get the money or assets the very next day. They first need to hit that pause button and wait for the administrative proceeding called probate to distribute those assets.

Probate is a court process meant to put all the affairs related to the estate in order. It identifies the creditors that have to be paid, how much money is left after all liabilities have been settled, who the beneficiaries are and what they should receive, etc.

The probate process can take up to a year to complete, and it’s only at that point that the beneficiaries can start taking the inheritance they are due.

For estates that avoid probate, such as a revocable trust, the beneficiaries can get the money almost immediately. However, they shouldn’t be rash in spending the money. Attorney Philip Ruce advises that they first leave it in a savings account while they get professional advice on how to protect the inheritance.

Putting Inheritance Money Into Action

Once the probate process or all other admin matters are settled and a beneficiary is ready to put that money into action, Attorney Philip Ruce suggests starting by thinking about their priorities. As much as possible, the inheritance should be invested into their future and protected with an estate plan.

Invest in the Future

A person should be intentional when handling inheritance money — and part of that means ensuring that they are partially investing in their future. The money received should be used in a way that will give it the ability to grow and make a difference later in life.

Protect the Inheritance

Next, the inheritance money should be protected through an estate plan. This will ensure that it is managed appropriately and goes to the right people in case something happens to the initial beneficiary. They should create an updated plan that reflects their values.

Is Inheritance Taxed in Minnesota?

Minnesota is generally very tax-friendly. While it has a state estate tax and federal estate tax, there is also a very high exemption amount that makes a big chunk, if not all, of the inheritance tax-free.

In cases where estate tax needs to be paid, the person receiving the money isn’t the one who settles it out of pocket. It’s netted out of the estate before the distribution.

Other types of taxes, like capital gains tax and income tax, do not apply to estates in Minnesota. The former is typically erased after death, while the latter does not come into play because inheritances don’t have to be claimed as income.

Perhaps the only exemption is if the inheritance comes from a pre-tax retirement account such as an IRA or 401(k). The assets here aren’t taxed because they are an inheritance, but due to the owner of the account not having paid taxes for them during life.

Sharing an Inheritance

Often, a person who receives an inheritance may want to make sure that the money they received also benefits their spouses or children. The best way that they can ensure that others benefit from their inheritance is to set up an estate plan.

In doing so, they can be intentional and create a plan that will satisfy their values and priorities. An estate plan allows them to control what happens to the inheritance money should something happen to them. Without it, the courts will use the default rules of intestacy statutes where they will have no control over who receives the assets.

As much as possible, one wants to overwrite those default rules and create an estate plan that allows them to control the money and ensure that their intentions are executed.

Wisest Ways to Use an Inheritance

Attorney Philip Ruce stresses the importance of protecting an inheritance by setting up an estate plan that reflects a person’s values, priorities, and wishes. Part of the inheritance should also be invested toward one’s future, allowing it to grow and be used to make a difference in life.

After those two things are done, then the rest of the inheritance money should be used for immediate things, whether that means paying off loans and creditors or finally taking that family vacation that’s been put off for way too long.

Learn More About Estate Planning for an Inheritance

Anyone who wants to know more about what to do with an inheritance and how to protect it with an estate plan can speak to the estate planning attorneys at Stone Arch Law. Or, they could go to stonearchlaw.com for free resources about estate planning, probate, probate avoidance, and more.

Interview Transcript

Interviewer:

Welcome back to Minnesota Live. This statistic, when we saw it, shocked us. The average inheritance from a will is over $46,000. And if someone leaves you money, you’re going to want to have a game plan before you start, well, spending all of it. Philip Ruce from Stone Arch Law is an estate planning attorney.

He joins us now to share what you need to know regarding inheritance. Something that you need to know about. Probably people don’t think about it all that much.

Philip Ruce:

That’s right. Thanks for having me back. It’s good to be here.

Interviewer:

Yeah, it’s great to see you. So what’s your number one thing? What’s the first thing people should do if they get an inheritance?

Philip Ruce:

Absolutely. I think the first thing needs to be to hit that pause button. Sometimes people are getting money very quickly. It’s coming from an investment account, a life insurance policy. Sometimes the pause button is hit for us, whether we like it or not because an estate is going through probate.

In fact, most estates go through this process called probate. It’s an administrative court proceeding where we figure out who are the creditors, what has to be paid, who’s left, how much money is left, where does it go. That can take up to a year. So if we’re getting money through probate, we already probably had that pause button.

But to the extent we’re getting money outside that process, don’t do anything rash. I know that people want to pay off their student loans, they want to pay off the mortgage, and they need that new car. There’s no harm in leaving it in a savings account for a little while while you get some professional advice and get an understanding of what your plan should be.

Interviewer:

So once that’s settled, you kind of have your feet under you a little bit, what’s the next step when you do start putting that money into action?

Philip Ruce:

We need to start thinking about what our priorities are, and I always want people to make sure they’re at least partially investing in their future. What I mean by this is we’ve got some money now which has the ability to grow and make a really big difference later in life.

This is a true story. When I was in my early 20s, my brother and I, had a very generous relative and we ended up… It wasn’t a lot of money. It was something like $10,000. But my brother put it towards a truck, and I was going back to school, so I bought a really nice computer and put the rest of it away. But here we are a couple of decades later, and I don’t have that computer and he doesn’t have that truck. And if we had just put that into something, 30, 40, $50,000 today.

So I know that’s not for everybody, but it should… Again, we’re looking for an intentional plan here, and let’s not forget about our future selves when it comes to that.

Next thing that I would watch out for is I would make sure that we are protecting that money. One way we can do that is to make sure our own estate planning documents are updated. So if something happens to me, what’s the plan? Is that family money that is supposed to go to my spouse? Is that family money that’s supposed to go to my kids? Do I have a charity or something that’s important to me? I want to make sure that my own documents are reflecting my values.

And also, be very careful of this, any family who makes their own decisions… I’m not advising against anything at all. Families do this all the time. But be very careful. If I have some money that comes from an inheritance, that money is in my name. For example, it’s not subject to divorce proceedings, typically, unless I make it into joint money. So if I take that money, put it in a joint account, and pay off the joint mortgage with my wife, that’s okay. People do that all the time and people should do it. But be intentional, understand that I’ve just gifted half of that. If things did go in the wrong direction, I’m probably not getting that money back.

Interviewer:

That makes sense. Okay. Is inheritance taxed in Minnesota?

Philip Ruce:

There are a few taxes… We get a lot of questions about this. Our office, Stone Arch Law Office, it’s in Southwest Minneapolis, and we get a lot of questions about estate tax. So Minnesota has a state estate tax, and there’s also a federal estate tax. But both of these taxes have a very high exemption amount or a relatively high exemption amount. It changes all the time. But the point is a big chunk of it is tax-free. Most estates are not subject to estate tax.

Even if there is an estate tax, the person receiving the money isn’t the one who has to pay it. It’s paid by the estate. It’s netted out. I get the results. It’s not like I then have to turn around and pay some tax.

At death, capital gains taxes are typically erased, so there are no capital gains. And you don’t have to claim an inheritance as income. So it’s not like I get this money and now I have to claim all this income and pay all the tax. So really tax-friendly, truthfully.

The only exception is if you get money in a pre-tax retirement account. So I’m talking like an IRA or a 401(k). Then this isn’t taxed because it’s an inheritance, it’s a tax because it’s an IRA account. No one’s paid taxes on that money yet. So if the person had survived to take that out, they would’ve paid tax. Now that it’s going to me, I’ve got to pay tax because it’s an IRA.

Interviewer:

Okay. So a couple of little nuanced things in there for people to know about.

Philip Ruce:

Absolutely.

Interviewer:

All right, it’s the holiday season, right? And everybody loves to get. What if you want to give an inheritance and set it up so somebody else can have the benefit of an inheritance?

Philip Ruce:

You bet. And this is what our office does. So now we’re talking a little bit about estate planning. So here’s where, again, we’re being intentional. What are my values? What are my priorities? Am I charitably inclined? Is it important to me that I have this money set aside for my kids’ education? I can make all of that happen in my estate plan.

If I do nothing at all, we’re going to use the default rules, which are the intestacy statutes, and this is where we go to probate and I don’t get to choose. We don’t want that. We want to overwrite those default rules. We can do that with a legal document. It’s a will. Everyone’s heard of a will. This goes through probate, controls probate, and makes things happen the way I want them to happen.

But probate takes a long time. It’s expensive and it’s very public. There’s an alternative called a revocable trust. This avoids probate altogether. Our office does a lot of these, and that’s a way to make sure that my wishes happen and it isn’t happening by some default.

Interviewer:

What do you recommend as far as what to do with that inheritance? I mean, you talked about the computer that you bought and the truck that your brother bought. What do you do with inheritance other than just save it? Are there other things that you think people can do wisely?

Philip Ruce:

This is kind of the fun part. So this is where we’ve been intentional. We’ve hopefully done some investing for our future, right? We’ve looked at our priorities. And now what are my values? Do I prioritize my education and my kids’ education? Is there a charitable cause that I’m not putting in my will, but today I want to support? I can really make a difference today by making some donations.

But also let’s look at some of the immediate things. Maybe it is time to pay off the student loans, and maybe it is time to take that family vacation that we’ve been putting off for a long time. If folks have questions about their estate plans, this is what we do.

Again, we’re in Southwest Minneapolis. Our office’s name is Stone Arch Law Office. Stone Arch like the bridge. And our website is stonearchlaw.com. We have a ton of video resources. We have a couple of eBooks that are totally free. You can download those and learn a little bit more about probate, probate avoidance. And of course, call our office with any questions.

Interviewer:

Makes a lot of sense. You can’t ever start too early thinking about that. Nobody wants to think about those kinds of things — what’s going to happen if someone that we love passes on, or if we do, but you’ve got to do it.

Philip Ruce:

And the idea is, obviously, peace of mind too. I feel better knowing that the plan is there.

Interviewer:

And I think it’s getting over that hiccup of a will and putting all that down, because your mind… The first time I did it, I really don’t want to do it. But now that I’ve done it, I’m like, “No, I hear you, now I’m being responsible with what my plans are and what my priorities are.”

Philip Ruce:

It seems like the process would be unpleasant, but it’s actually very educational, and very approachable. And then when you’re done-

Interviewer:

Relief. You feel good.

Philip Ruce:

It’s done.

Interviewer:

Yeah, don’t hesitate. Philip, so great to see you.

Philip Ruce:

Thank you.

Interviewer:

Happy holidays.

Philip Ruce:

Happy holidays to you too.

Interviewer:

Thank you.

Philip Ruce:

Definitely.

Interviewer:

We have posted all of the contact information for Philip and the team there at Stone Arch Law on our website at minnesotalive.com, so definitely check it out.