Question

A new client enters your office and indicates to you that in 20X1, he or she inherited $300,000 from his or her father's estate. The client wants to invest the money in a way that will result in the least amount of gross income in the current and future years.

What would you advise the client with respect to the inheritance received.

Answer 1

My advice to the new client would be that if the client has access to a tax-advantaged 401(k) retirement plan then ensure that he/she contributes the maximum amount in the plan. The client will also be advised to set up a Roth IRA. Roth IRA will enable the investments made by the client to grow in a tax free manner. The client should use the inheritance money to pay more of his/her daily expenses and monthly mortgages so that he/she can put more of the paycheck into 403(b) retirement savings plan.

Another long term investment avenue that should be considered is muni bonds that pay tax free interest.

Another option that can be looked at is parking some funds in a trust. You can put cash, property and investments in a trust but the only catch is that neither you, nor your spouse or any of your children should benefit from the trust. This will ensure that the inherited amount is no longer a part of your estate and hence will not attract any inheritance tax.