It’s no surprise that many people who have inherited millions of dollars are unsure what to do with their newfound wealth. The opportunities to become a multi-millionaire overnight can be overwhelming, especially at a time when most are grieving the loss of a parent or other loved one.
I often work with people of many different ages who have suddenly become wealthy from a windfall inheritance. While it is necessary to develop a comprehensive financial plan, this is not the first step. Instead, I try to use money to determine each person’s starting point. Many people fall into one of three categories:
- They are considering how to manage their wealth, but the money hasn’t arrived yet.
- They have their inheritance—often millions of dollars—but they still grieve the loss of a loved one and seek guidance on next steps.
- The inheritance has long been in their bank account, but they still have no direction and cannot make decisions.
It’s important to listen to the personal story of each person with a windfall. It’s difficult to lose someone important in your life, and it’s just as important to think about that person’s impact. Many people express a desire to do something to meet their parents’ wishes.
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Figuring out how best to use the inheritance
Here’s how I generally approach these conversations to help a person make the most of their legacy:
Define their relationship to money. I begin by asking what role money played in her childhood and how it shaped her relationship with money today. Money is a taboo subject for many families and has hardly been discussed for generations. For others it was openly discussed, but perhaps because there never seemed to be enough. Now their newfound wealth makes them feel like they can have whatever they’ve always wanted, or maybe they feel like they need to save it for the next generation.
It’s not uncommon for someone who has been told there was never enough money, or who has long expected to get the money, to do something rash. But this behavior can quickly jeopardize their long-term financial well-being. Understanding each person’s relationship with money helps establish a baseline for a solid financial plan.
Discuss their goals and dreams. It is important that a person can speak openly about how they intend to use their inheritance. Most adult children understand that their parents have worked a lifetime to generate their wealth and may therefore be afraid of losing the inheritance.
To help them set goals, here are the top three questions I ask:
- Are there any instant purchases you want to make? This could be renovation work, a new car, a second home or travel plans.
- Any guesses as to who should get some of that money? This can be a sibling, child, relative, church or other organization.
- If you spend all the money, is that ok? Or would you feel that you are not honoring the person who left you the money?
In order to create a truly customized, comprehensive financial action plan that fits a person’s emotional and psychological well-being, it is important to examine how expectations are managed. Discussing the three questions above often helps my clients understand the possible uses of their money. And it gives us a better understanding of the assumptions about who thinks they should get some of the money.
Don’t give away your money just yet. It is usually not long after the death of a parent that family members, friends and others ask for a part of a person’s inheritance. Many family members or a local church or other community organization may believe they are eligible to receive a portion of the money.
I strongly advise my clients not to gift money, even to family members, until a financial plan is in place. When they receive a request, I ask them to provide this response:
“I now work with a financial planner to create a personal financial plan and make the best decisions about how to use that money. As soon as I’m organized and have a plan, I’ll get back to you.” Holding this position prevents a person from making irreversible decisions that may jeopardize their future.
Development of a plan that suits your needs. Once a person has addressed the emotional issues surrounding the handling of the inheritance, I can begin to create a customized financial action plan.
Educating people about their new wealth is part of this process. For example, some don’t realize that they may owe hundreds of thousands of dollars in taxes as part of their inheritance. Because everyone’s financial knowledge is different, it’s important to explain the plan in layman’s terms. Even astute individuals can be confused by the tax implications of an inherited IRA.
It is important to familiarize yourself with possible lifestyle changes
My number one goal is to help the person or couple who inherits money to adjust to their new wealth and the lifestyle changes that will come with it. Once they take the time to talk about their relationship with money and the impact their loved one has had on their lives, we can develop a plan to help them remain financially independent throughout their lives. Remember that the information shared here does not take into account your personal circumstances and it is important to consult an appropriately qualified professional before making any financial, investment, tax or legal decisions.
This article was written by and represents our contributing consultant, not the Kiplinger editorial board. You can view advisor filings with the SEC or with FINRA.
