Wealth Notes – June 13, 2012

Making The Most Of Inheritances

By Rob Wrubel, CFP^®, AIF^®

A study funded by MetLife and conducted by the Center for Retirement Research at Boston College estimates that baby boomers as a group stand to inherit $8.4 trillion dollars. The estimate says that two-thirds of boomer households will receive some form of inheritance with a median of $64,000 and high-net worth households receiving substantially more. As a group, they will need it as boomers did not have the same savings mindset as their parents and grandparents did.

Inheritances come to people with confused feelings. The inheritance received comes upon the passing of a close family member – usually one’s mother or father. Often, the family has had time as the person has been ill or their passing is expected. Sometimes, the death comes as a shock – a result of an accident or from an unexpected health complication like a heart attack or undiagnosed cancer.

In our financial planning work, we ask the question of whether or not you expect to receive an inheritance. We need to know as an inheritance handled well can make a significant contribution to a person’s ability to achieve goals and enjoy life. Inheritances handled poorly can result in even more mixed emotions, feelings of regret and cause changes to lifestyle with negative long-term impacts.

Many people do not assume that they will receive any inheritance in life. If that is the case, you will need to take steps to save enough and invest over time to support your lifestyle – including food and shelter, charitable giving and have enough income and capital to maintain your way of living through retirement.

Those expecting inheritances must take some steps to be prepared to handle whatever they are given. Unfortunately, people who receive lump sums often fail to prepare themselves to handle the money coming to them. This seems to be the case no matter how much the money is (as long as it seems to be a large lump sum compared to what they are used to). $100,000 might be a fortune to one and seem small to someone else.

Here is some advice to avoid potential pitfalls.

1. Do not make decisions when emotions are high. Generally, people should not make any significant financial decisions within a few months to even a year of a significant emotional event. The death of a parent or other family member requires a period of mourning. Too often, people seek to replace the negative feelings of loss of a loved one with positive feelings gained by taking a big trip, making an expensive purchase or living the high life. They look to spend their way out of their feelings. This does not last long. Take time to mourn. Wait before making any big decisions. Meet with your legal, tax and advisory team to craft a plan but give yourself time before implementing.
2. Planning works. Those who have plans in place can be prepared better to handle inheritances. They may have modeled how to handle the money or property well before receiving it. Planning can help determine how much of the expected income will be needed to add to existing capital to generate the future income needed in retirement. Or it can show that the inheritance is truly an additional gift, and that money can be used to create lasting family education accounts, charitable donations or used for “once in a lifetime” opportunities.
3. Build a team. We often hear from our retired clients that they worry that their children will not know how to handle the money left to them. They worry that unscrupulous people will find a way to separate their heirs from their money. We recommend that people build a team of trusted advisors and have their children start to work with members of that team. This gives the heirs time to adjust to their expected inheritances and resources to speak with as they make their own decisions.
4. Decide on your control mechanisms. Your estate plan can help you maintain a degree of control over the wealth and assets you have achieved. You can decide whether to make your estate gifts outright transfers or to keep those assets in some form of trust where you determine the access to assets over time.
5. Blow off a small amount of the money. For some, an inheritance is the first time they have had access to a lump sum. So often, savings these days occur in people’s homes and retirement accounts. These are not easily accessible and have been designated for certain purposes. Now an inheritance comes, and there is more spendable cash than a person has had before. It is too easy to spend? We recommend that people take a small amount of that and do something new and different. This will help fight the urge to use all of it and hopefully slow the impulse to spend without a plan. You have the “feel good” moment and have done it without eating into much of the capital.

Our experience tells us that people who prepare emotionally and intellectually to handle money fare better than those who do not. Few of the people I speak with ever want to get their inheritance earlier than expected, if at all. A few minutes of conversation and discussion with us can help you start to be ready for any inheritance you may receive.

Rob Wrubel CFP^®, AIF^®, is a Senior Investment Consultant with Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.