An inheritance can provide an immediate financial boost. Wisely navigating the tax and investment issues can help ensure its value continues to benefit you and your loved ones Inheritances can come in many forms, ranging from cash and investment positions to real estate and collectibles. While a bequest can immediately enhance your financial situation, it's important to maximize the benefits of your inheritance by planning carefully for the long-term. "You need to reflect on what assets you already have and how the inheritance fits into your overall investment plan," says Carlton Brown, Estate Planning Specialist in Wachovia Securities' Strategic Solutions Group. "Doing something rash is probably one of the most common mistakes people make. Not having an understanding of the tax ramifications is another significant error."

Vary Your Approach Based on Asset Type

When considering how to integrate an inheritance into your overall financial strategy, it's vital to first consider what form the bestowal is taking.

Retirement accounts. The rising popularity of individual retirement accounts means that IRAs are increasingly part of estates, according to Brown. For surviving spouses, the process is generally simple: For instance, they can roll over IRA assets into their own account without penalty. Non-spouse beneficiaries cannot do that, but the IRS allows what is called a Stretch IRA — simply the ability to spread distributions from the inherited IRA over many years. Doing so can potentially reduce the tax burden and avoid certain penalties on distributions. It is sometimes possible to name succeeding beneficiaries, allowing an IRA to benefit multiple generations. Given the many rules governing when distributions must be taken and how long the IRA can be stretched, consultation with a financial professional is imperative.

Stock positions. Every portfolio should be sufficiently diversified to avoid
catastrophic risk. Inheriting concentrated stock positions can suddenly inject a
greater amount of risk into your finances by having too high a percentage in one
company or sector. Fortunately, the government provides a stepped-up cost basis
on inherited equity positions. This means that the price of the security on the day
you inherited it is the cost basis, not the cost which the grantor originally acquired
the security. Under this framework, people can sell inherited positions
immediately and pay only capital gains on any increase in value from the date of
death to the time of sale. Bequeathed stock is considered a long-term gain no
matter what the holding period.

Real estate. Inheriting property can mean immediate costs up front in the form of
property taxes and insurance. Since estate tax bills must be paid within nine
months of death, it also can present a situation where people may feel they need to
sell an illiquid asset in a short period of time. The IRS does allow for the
possibility to pay estate taxes in installments over as long as 14 years if the
property is a closely held business.

Jewelry and collectibles. Often overlooked when inheriting non-cash bequests like jewelry, art or other valuable items are two significant questions, says Brown: "Do you have the means to protect the asset, and are you properly insuring it?" The first steps should be properly documenting the item and raising your property and casualty insurance to a commensurate amount.

Integrate Your Financial Strategy

Once you've taken care to minimize taxes, another vital step is properly investing the inheritance. Beyond ensuring the funds are integrated into your overall financial strategy, consider the added flexibility a bequest can provide to your financial goals.

"An inheritance can mean a whole lot toward getting the kind of income you want in retirement or sending children or grandchildren to college," adds Brown.

Inclinations to give significant sums to others as a result should be tempered by the fact that gifts will be subjected to tax if they exceed the annual gift exclusion — currently $12,000 per recipient. Another way of gifting for education includes 529 college funding plans. Under current regulations, one can make up to five year's worth of 529 plan contributions at once without triggering the gift tax (but then cannot make any for the next five years).

Another common option for those looking to do good with their windfall is the establishment of a charitable remainder trust (CRT). Donating assets to a qualified CRT has the benefit of generating a large up-front deduction while providing a stream of income to the grantor. Upon death, the remaining assets in the trust go to the charity. Regardless of the form an inheritance takes, it shouldn't be treated as found money, Brown stresses. "Integrating it into your investment plan will help make sure it fits in with everything else."

Together, with your tax and legal advisors, we can discuss: The most tax-efficient way to treat an inheritance. How to integrate new assets into a balanced portfolio. How to make an inheritance benefit multiple generations.

Wachovia Securities is not a legal or tax advisor. Trust services are offered through Wachovia Bank, National Association, a national banking association (chartered by the Office of the Comptroller of the Currency) and a wholly owned subsidiary of Wachovia Corporation. The accuracy and completeness of this article arc not guaranteed. The opinions expressed are those or the author and are not necessarily those of Wachovia Securities/Wachovia Securities Financial Network or its affiliates. The material is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Provided by courtesy of Jeff Kernodle, a Senior Financial Advisor with Wachovia Securities Financial Network in Searcy. For more information, please call Jeff at 279-0101. Wachovia Securities Financial Network, LJ-C, member FfNRA and SIPC, is a separate nonbank affiliate of Wachovia Corporation. ©2008 Wachovia Securities, LLC.