Receiving an inheritance: Could it require changes to your estate plan?

The process of receiving an inheritance typically begins with the passing of the benefactor. If the deceased had a valid last will and testament, the executor or personal representative named in the will is responsible for initiating the probate process. Probate is a court-supervised procedure that involves proving the will's validity, identifying and inventorying the deceased's assets, paying any outstanding debts and taxes, and ultimately distributing the remaining assets to the named beneficiaries.

If the deceased had no will, the estate will be subject to the state's intestate succession laws. In this case, a court-appointed administrator will manage the distribution of assets according to the state's predetermined hierarchy of heirs.

Once the probate process is complete, beneficiaries will receive their inheritance according to the terms of the will or intestacy laws. This may involve the transfer of money, property or other assets.

Receiving an inheritance can have significant implications for individuals who are currently receiving Medicaid benefits. Medicaid is a means-tested program, meaning that eligibility is based on an individual's income and assets. An inheritance, as a sudden influx of wealth, can push a recipient's assets above the eligibility threshold, potentially disqualifying them from Medicaid coverage.

However, canceling Medicaid upon receiving an inheritance may not always be the best course of action. Some strategies can help individuals maintain their eligibility while still benefiting from their inheritance. For example, the "spend down" process allows individuals to spend their excess assets on approved expenses, such as medical bills or home improvements, to reduce their countable assets and maintain Medicaid eligibility.

Another option is to transfer the inherited assets into a trust, such as a Medicaid Asset Protection Trust (MAPT), which can help shield the assets from Medicaid's eligibility calculations. However, it's crucial to note that there are strict rules and timeframes associated with these strategies, and improper planning can result in penalties or disqualification from Medicaid.

Consulting with an experienced attorney can help you navigate the complexities of Medicaid eligibility and develop a plan that maximizes your inheritance while maintaining your essential government benefits.

Supplemental Security Income (SSI) is another means-tested government benefit that provides financial assistance to individuals with limited income and resources. Like Medicaid, receiving an inheritance can affect your eligibility for SSI benefits.

If you are an SSI recipient and receive an inheritance, you must report the inheritance to the Social Security Administration (SSA) within 10 days of receiving it. Failure to report the inheritance can result in penalties or even criminal charges.

The impact of an inheritance on your SSI benefits will depend on the value of the inheritance and how you choose to use it. If the inherited assets push your countable resources above the SSI limit ($2,000 for individuals or $3,000 for couples), you may become ineligible for SSI benefits.

However, there are some strategies you can employ to maintain your eligibility. One option is to spend down the inheritance on approved expenses, such as medical bills, home improvements or other necessary items. Another option is to transfer the inherited assets into a special needs trust (SNT), which can help protect the assets from being counted against your SSI eligibility.

As with Medicaid, it's essential to consult with an experienced attorney knowledgeable in SSI and disability planning to ensure that you are making informed decisions and complying with all relevant regulations.

Receiving an inheritance can also have tax implications, although the specifics will depend on the type of assets inherited and your individual tax situation. In general, inheritances are not considered taxable income at the federal level. However, there are some exceptions and nuances to be aware of:

• Estate taxes. While most estates are not subject to federal estate taxes due to the high exemption threshold ($13.61 million for individuals in 2024), some states impose their own estate or inheritance taxes with lower exemption amounts. If the estate from which you are inheriting is subject to these taxes, the amount you ultimately receive may be reduced.
• Income taxes on inherited assets. While inherited assets are not subject to income tax at the time of transfer, any subsequent income generated by these assets (such as interest, dividends or rental income) will be subject to income tax. Additionally, if you later sell an inherited asset, you may owe capital gains tax on any appreciation in value since the date of the original owner's death.
• Retirement account inheritances. Inheriting a tax-deferred retirement account, such as a traditional IRA or 401(k), comes with its own set of tax rules. As a non-spouse beneficiary, you will typically be required to take distributions from the account over a certain period, and these distributions will be subject to income tax.

To minimize the tax impact of an inheritance and ensure compliance with all tax laws, it's advisable to work with a financial professional who can guide you through the process and help you make informed decisions.

Receiving an inheritance can be a catalyst for reassessing your own estate plan. The influx of new assets may require updates to your existing plan to ensure that your wishes are accurately reflected and that your loved ones are adequately provided for.

Some key areas to review and potentially update include:

• Will and trust documents. If your inheritance significantly changes your financial situation, you may need to revise your will or trust documents to account for the new assets and ensure that they are distributed according to your wishes.
• Beneficiary designations. It's essential to review and update the beneficiary designations on your own accounts, such as life insurance policies, retirement accounts and bank accounts, to ensure that they align with your current wishes and take into account your inherited assets.
• Estate tax planning. If your inheritance pushes your estate's value above the federal or state estate tax exemption thresholds, you may need to incorporate additional tax planning strategies into your estate plan to minimize the potential tax burden on your heirs.
• Charitable giving. An inheritance may also present an opportunity to reassess your charitable giving goals and incorporate more philanthropic planning into your estate plan, such as establishing a donor-advised fund or charitable trust.
• Long-term care planning. Receiving an inheritance can also be a good time to review your long-term care planning and consider strategies for protecting your assets from potential long-term care expenses, such as establishing a Medicaid Asset Protection Trust or purchasing long-term care insurance.

Working with an experienced Legacy Plan network estate planning attorney can help you deal with the complexities of updating your estate plan in light of your inheritance, ensuring that your assets are protected and your wishes are carried out.

Receiving an inheritance can be a significant event with far-reaching implications for your financial situation and estate plan. By understanding the process of receiving an inheritance, its potential impact on your taxes and government benefits, and the need to review and update your own estate plan, you can make informed decisions that maximize the benefits of your inheritance while protecting your assets and providing for your loved ones. Consulting with a team of qualified professionals, including an estate planning attorney, tax professional and financial professional, can help you navigate this complex landscape and ensure that your inheritance is managed wisely and in alignment with your long-term goals.