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How do you receive inheritance money?

What is the probate process?

The bottom line

LearnInheritanceHow Does an Individual Receive Inheritance Money?

How Does an Individual Receive Inheritance Money?

May 25, 2023


8 min read

Understanding the probate process to access an inheritance, after a person dies, is key to preventing risks. Also, it helps you to know how, and when to use it.

Estate planning is the process of preparing a series of documents detailing how a person wants their assets to be divided after their death. Having estate planning documents like a will and power of attorney—which legally gives someone authority to make health and business decisions, for example, on another person’s behalf—makes it easier for loved ones to have a plan in place to help pass on inheritances more efficiently. 

An individual who knows they are a beneficiary of assets may wonder, “How do you receive inheritance money?” The answer: It really depends, since a person can come to receive an inheritance in various ways.

How do you receive inheritance money?

An inheritance is the assets an individual receives from a person who has died. These assets can include money in bank accounts, stocks, real estate, personal belongings, vehicles, and retirement plans. The process of receiving inheritance money can vary depending on the asset, its value, and the type of estate planning set up in advance by the deceased. Receiving an inheritance can take months or even years. But it’s possible to receive an inheritance earlier rather than waiting for the court or appointed executor overseeing the estate to distribute the assets.    

4 Ways to receive inheritance 

There are several different ways to pass on an estate. Some options bypass probate, a court proceeding to divide assets. These include:

  1. Trust fund.

    A trust is a legal document that details how a person’s accounts and property will be divided, but is effective as soon as it’s created and actively managed while the person is still alive. The assets, including cash and real estate, are held in a trust fund. Setting up a trust can help avoid probate, making it easier for beneficiaries to receive their inheritance.  

  2. Will.

    A will is a legal document that spells out who receives personal property after the owner’s death. It’s different from a trust because a will is entered into probate court to distribute the assets. 

  3. Payable on death (POD).

    Bank accounts, retirement accounts, and life insurance will automatically transfer an inheritance if beneficiaries are designated. Listing beneficiaries on these accounts can be the easiest and quickest way to transfer those assets outside probate court. However, it won’t work for personal belongings that a person may want to pass on to family, friends, or charitable organizations. A will or trust can accomplish that. 

  4. Deed with a life estate.

    One way a person can receive an inheritance of real property is by deed. A special deed called a life estate deed allows a person to own the property during their lifetime. It then automatically transfers property ownership to another person when the original owner dies. 

Timing to receive inheritance 

The time it takes to receive an inheritance depends on how it is being transferred. It can take a few months if there is a will or trust. However, if there are no legal documents transferring property, dividing assets could easily take years. 

Before the executor overseeing the estate can distribute assets, the non-cash assets are tallied and assessed to determine estate value. The value of assets can affect whether certain taxes will apply and the type of process that can be used to transfer estate assets. The estate is required to pay all outstanding bills and debts that have not been discharged, or paid, at the time of death. The beneficiaries receive the remaining assets, minus any fees associated with the probate process. The fees resulting from the probate process can vary depending on the state and size of the estate.

Suppose the person planning to pass on their assets wants their beneficiaries to receive and begin enjoying their inheritance earlier. In that case, they can leave money and property to others during their lifetime as gifts. A person can gift up to $16,000 per recipient in 2022, without tax consequences. 

It is also possible to receive an inheritance early through a third-party company, sometimes known as a probate advance company, that pays an individual an advance against their inheritance. If a person wanted to receive their inheritance money quicker instead of waiting for the estate to go through probate, this could be an option. 

To qualify for an advance of inheritance, some companies may require a minimum expected inheritance. Getting a cash advance on an inheritance could involve fees and giving a company a larger stake in an inheritance than advanced. For example, a beneficiary might expect a $15,000 inheritance and a probate advance company agrees to advance $10,000 in exchange for rights to $12,500 at close of probate. This would likely result in receiving less than the inherited amount, though how much can vary based on the company. Because of the complexity, it may be helpful to consult a probate, trust, and estate planning attorney.

Restrictions on receiving inheritance 

Even if the deceased prepared a will or trust, a beneficiary could encounter restrictions on the inheritance. There may be limitations on how any inherited money is used, such as only for educational purposes. Or, a requirement to live in any real property that is inherited. Both documents could also impose age restrictions on when the funds can be made available to the person receiving the inheritance or tied to life circumstances, such upon marriage.

A beneficiary inheriting a retirement account may encounter different restrictions. For example, if a non-spousal beneficiary who is 18 or older inherits a 401(k) or individual retirement account (IRA), they must take payouts within 10 years and pay taxes. If the beneficiary is the spouse of the deceased, however, they can leave the money in the account or roll it over into their own plan. 

What is the probate process?

Probate is a court proceeding that manages a person’s estate after they have passed away. The goal is to settle the deceased’s estate by paying debts and distributing ownership of the assets to heirs and designated beneficiaries. This process can be complicated and costly.

8 Steps of the probate process

The general probate court process is the same but can vary between states based on state laws and whether the person died with a will, called testate, or without a will, considered intestate.

  1. Appoint an administrator or executor.

    If a person died without a will, an administrator will be appointed to execute the estate. If a person died with a will, the named executor manages the estate. Both administrators and executors are responsible for settling the estate.

  2. File a petition.

    A person, usually the executor of a will or administrator, files a petition with the court, typically in the county where the deceased lived. This process includes filing the will if there is one, and filling out an application with details about the individual who died and providing a death certificate. Procedures and requirements vary by state.

  3. Give notice.

    Notice is given to potential creditors, heirs, and beneficiaries of the deceased. State laws determine how notice is given but may include signed affidavits and newspaper publication as proof of notification. This gives creditors an opportunity to submit information about any of the deceased’s debts outstanding, or money owed. For beneficiaries, notice is given to make them aware that probate has started.  

  4. Authenticate the will.

    Before the beneficiaries can receive an inheritance, the will is required to be authenticated and deemed valid by the court. This is significant because it provides the beneficiaries and potential beneficiaries a period to contest the will’s validity. Fraud, discovery of a newer will, or the deceased’s state of mind when creating the will may be arguments brought up during the authentication process. This can delay or, in certain instances, prevent an individual from receiving an inheritance. In most cases when preparing a will, a self-proving affidavit, which is a short form with a legal statement declaring a will is valid, is also signed to make authentication easier. 

  5. Value assets.

    The assets of the deceased are collected and value assessed. Assets can include bank accounts, retirement accounts, vehicles, real estate, jewelry, and collections, such as art. If the value is within a certain range, which varies by state, a small estate affidavit may be signed to transfer assets outside formal probate.

  6. Pay creditors and taxes.

    The estate’s assets pay valid claims from creditors. Tax returns are filed, if applicable. 

  7. Distribute assets to beneficiaries.

    The remaining assets, minus any probate fees, are distributed to the beneficiaries according to the will or by following state laws of succession (the order of heirs) if the person dies without a will.  

  8. Close estate bank account.

    The final step of probate is for the executor or administrator to make final distributions to the beneficiaries as outlined in the will or as directed by state law, conduct a final accounting reflecting a zero account balance, then close the estate’s bank account.  

The bottom line

The probate court process is when the deceased’s estate is settled by paying debts and distributing the remaining assets to beneficiaries, called an inheritance. 

Individuals can receive inheritance money in different ways including through a trust and from a will, which can come with restrictions, or as a beneficiary on a bank or retirement account. Usually, an inheritance is received after a person’s death, but if a person wants to share their wealth before passing, there are options such as gifting assets that would otherwise be inherited. 

After a person dies, a beneficiary expecting an inheritance who does not wish to wait for completion of the probate process, can also tap their inheritance early by using a third-party company to advance their inheritance. But this may come with a risk of fees and not receiving the full inherited amount. Understanding how the probate process works can help an heir or beneficiary better realize how long it can take to receive inherited money, and what it can be used for after it’s received.

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