How To Adjust Your Financial Plan When You Receive An Inheritance

How To Adjust Your Financial Plan When You Receive An Inheritance

December 04, 2017

It’s a problem that everyone will face in our lifetime – the passing of a parent. But if there is money to be left behind, how do you manage it wisely and honor their legacy?

Over the next 40 years, more than $30 trillion will pass to the “baby boom” generation and then onto the next generation. Unfortunately, American families don’t have a great financial track record in preserving family legacies. According to a 29-year study by the Williams Group, nearly three-quarters of high-net worth families failed to successfully transfer assets from one generation to the next. Tragically, in nine out of ten families, the assets disappeared completely before reaching the third generation.

In most of these cases, the failure was not due to any legal or financial issues in settling the estate. It was primarily due to mismanagement by heirs as a result of poor communication among family members, or being unprepared to manage a sudden windfall. Very often it was due to a lack of shared-purpose or mission in carrying on the family legacy.

Making It Count

For many people, a family inheritance can be life changing – an opportunity to take their lifestyle up a notch and realize dreams for them and their children. Undoubtedly, that was the hope of their parents who worked hard to create a legacy or preserve one from a prior generation. They hoped that the money they saved would last longer than one generation. If you expect to receive an inheritance or you have already received one, it would be important to consider the long-term impact of your decisions. Even if it’s not a sizable sum of money, some consideration should be given to how to honor the legacy left by your parents. Here are three key steps to ensuring you can make the best decisions for you, your family and their legacy.

Think About Its Purpose

It’s not every day that a windfall comes your way. This one happens to be the result of your parents’ generosity and their love of family. If you didn’t get the chance to discuss with your parents’ their vision for the legacy, put yourself in their shoes to imagine what they would want to see happen. It’s important to have a purpose for the money. Without a purpose, people tend to get caught up in the pursuit of “more,” which doesn’t lead to fulfillment or happiness. How will you use the money to create the most shared economic value for your family and the children of your children? Having a vision and discussing it often among family members is the surest way to continue a legacy.

Don't Make Rash Decisions

Taking time to think about the legacy’s purpose will help keep you from making any immediate decisions on what you should do with the money. It’s important to avoid making rash decisions without first taking the time to grieve and then making long-term plans for the money. There is no need to start investing it right away – putting it in a bank account is just fine. You should avoid making any large purchases or even a lot of small purchases until you have a plan in place. Certainly, if you have some high interest debt to payoff, it would be a good use of some of the funds.

Get Help

You would like to think that having more money would make life easier. In fact, it can make things more complex, especially as it relates to tax, estate and financial planning issues. It would be important not to try to go it alone. With your money parked safely somewhere, you can take your time to find a financial advisor you know has the experience in working with heirs and who has your best interests in mind. A Certified Financial Planner (CFP)  - like myself - would be best positioned to address all of your planning needs. They have expertise in multiple financial disciplines and are experienced in working collaboratively with other advisors, such as a CPA and attorney. CFPs are held to strict fiduciary standards and most charge a fee, which minimizes the chances of any conflict of interest.

This is an opportunity to think about what you really want to get out of life – for you and your children. As the dire statistics seem to indicate, you may only get one chance to achieve it. It will take a little work and lots of communication with your family, but it is a chance to achieve true fulfillment while enjoying life a little bit more.