Wealth Management & Financial Planning

Wealth Management & Financial Planning

Navigating Unexpected Financial Windfalls

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Coming across unexpected cash in a pair of jeans or finding change in a parking lot is one of life’s little pleasures.  You simply pocket the windfall then deposit it at the bank or indulge in a little retail therapy.

But what happens when you’re notified that you’re the recipient of unexpected funds? Things get a bit more complicated.  The amount of such ‘windfalls’ can range from $10 to many thousands of dollars. Understanding the procedural requirements and tax considerations associated with receiving unexpected money is important.  Three areas must be addressed.

First, confirm the ownership of the asset. Is the asset in one of your parents’ names with you listed as a beneficiary? If so, you will need a death certificate and proof that you are entitled to the asset. Many times, the account is in both parents’ names although one parent is deceased. In that case, you must remove both names and add your name as account owner. You also have to make sure that you are the only beneficiary listed on the account.

Occasionally, a child will title an asset in their individual name with the intention of dividing the funds among siblings. While this strategy can be adequate for smaller amounts, it can turn into a nightmare if the account value is large. The tax complications begin to pile up.

Once you have the account titled in your name, it is important to understand how the funds will be taxed. If the funds are in an IRA, you will be dealing with an inherited IRA that has both your name on it as well as the name of the deceased individual. While money is easier to transfer when a beneficiary is designated, you still must do things in the right order and this is one case where you cannot take control and divvy up the funds among your siblings.

The third issue relates to the structure of the asset. The money could be in the form of a tax refund check or a forgotten bank account. Both of these situations are treated as cash and are easy to deal with when the first two issues are resolved. Stocks are a sticker situation. You might receive shares of stock purchased years ago under a dividend reinvestment plan (DRIP) where your benefactor purchased shares of stock directly from a company and used dividends to buy more shares over time. We sometimes see shares of stock that were misplaced by the original owners who didn’t even realize they owned any stock!

When a mutual insurance company goes public (think Prudential), shares of stock are issued to the policyholders. If you aren’t expecting notification or simply overlook the letter, you could miss a payout ranging from a few hundred dollars to thousands of dollars waiting for you. Make sure that before you sell any asset, you have a way to establish your tax base for reporting to the IRS.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]

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