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Receiving an Inheritance

(a/k/a "The Windfall Worries")

It has been our experience that many clients are uncertain how they should react to being given a substantial inheritance.  The following advide appears to help people plan in advance of receipt of the inheritance funds. 

1.  UNDERSTAND WHERE YOU ARE AT - EMOTIONALLY.

The old saying goes "the more choices a person has, the more likely he or she is to do nothing."  It's called financial paralysis.  And it's not too much of a leap to see why coming into a windfall would cause someone to freeze in his or her tracks.  Paralysis is just one pit stop on the path most inheritors travel.  The six stages usually cited are: disbelief, anger, euphoria, guilt, paralysis, and becoming "heirworthy."  As inheritors travel this emotional spectrum, they finally end up with a sense of appreciation and understanding.  Recognizing that the windfall has its limits, inheritors eventually focus on wealth preservation and growth.  They look toward leaving a windfall for their own children, or for a cause or charity.  Gracefully getting to the final stage can be a struggle.

2.  DO NOT PUT YOUR LIFE ON HOLD, WAITING FOR THE WINDFALL.

In other words, live your life, save like nothing's coming to you, and be grateful if your loved ones are able to leave you a small, or large, gift of money.  Avoid discussing the money with others, and, at all costs, do not let the funds dictate who you are.  You are the same person, but with more resources.

The emotional trip can last a long time.  But so can the administrative aspects of inheriting money.  A couple of years, particularly in cases in which a federal estate tax return must be filed, is not unheard of.  If you don't know what to do with the money, seek the help of a trusted professional.  An advisor can help you work through the tax and administrative issues of handling a windfall, and make investment recommendations that best suit your financial situation.

3.  ON THE OTHER HAND, BE AS PREPARED AS YOU CAN.

Although you may be reluctant to bring up the topic, it is important to be open with your older relatives about their financial wishes.  Similarly, do not leave your children in the dark.  It's one of life's toughest money converstations.  In fact, it may be the hardest conversation you ever have, period.  Here are some tips for having that conversation:

A.  Human nature seems to compel us to wait to tell people our true feelings until they (or we) suffer a near-death experience. Too often, we are forced to face prickly topics at the most inopportune or unexpected times.  But life is filled with difficult conversations.

B.  Make it clear that you are having this conversation out of love and concern, not greed.  It's not about money and who's going to get what.  It's about respecting and carrying out their wishes, and allowing the surviving family to spend the time together celebrating their memory, not weeding through financial documents and second-guessing one another.

C.  Explain the consequences of not making their wishes known.  Without explicit direction, (in a Last Will, for example) estate taxes may take an unnecessarily large cut of their estate, or at least hold it up in probate, dragging the process on.  A lot of pain and confusion can be easily avoided by filling out just a few important documents.

D.  Avoid having this conversation immediately prior to a major operation, when someone is depressed, or when ill will exists between family members over a recent squabble.

E.  Important papers:  You want your stuff to go to the people you love - and to leave a lasting memory as the thoughtful, organized, and efficient relative that you are.  The surest way for a loved one to realize their wishes is to simplify the paper trail so that the family can effortlessly follow it at a time when they are probably thinking of other things.  (Important documents include a Last Will, and Advance Health Care Directive (formerly known as a living will), a Durable Power of Attorney, and medical power of attorney.)

F.  Be a role model with your own planning.  Consider the psychological benefits of documenting your wishes and telling close family and friends where to find all the necessary paperwork.  Share that feeling of enlightenment with your parents and older relatives.  Tell the people you love that if they plan ahead, what's left of their nest egg will leave a lasting impression with the people and places that are most meaningful to them.

4.  TREAT THE INHERITANCE AS YOU WOULD ANY OTHER MONEY.

A dollar spends the same, no matter where it cames from.  If you don't have an emergency fund, use some of your windfall to start one.  Pay off your credit card debts or any other high-interest loans.  Think about the future too, and put some of the gift away for the long term.  Avoid investing as your parents did, or leaving the investments in their same format.  Chances are, you are in a different tax bracket than your parents and are in a different stage of life.  Your investments should reflect your needs.

It might not be a bad idea to institute a waiting period after inheriting some money.  It allows you to work through some of the emotional stages and approach a windfall with a cool head.  A 1998 survey for financial products firm Lutheran Brotherhood asked participants how they would spend a sizeable windfall.  Here's the shopping spree breakdown: home (31%), education (30%), vacation (10%), car (9%), help children/family members (3%), pay off debt (2%), invest it (1%).  What would you do with a windfall?  Consider your options now before you are faced with the array of possibilities.  In the meantime put that money into a short-term savings vehicle that will keep your money safe from inflation and market ups-and-downs.

With these thoughts in mind, hopefully you can avoid some of the agitation that too often comes with an inheritance.