Inheriting can be a financial windfall—if you do it right.
Receiving an inheritance can change your life in ways you’d never expect. Take the woman whose hefty new income (some $400,000 annually from her share of stock in a family business) enabled her to divorce her alcoholic husband of 10-plus years.
“She got out of a marriage she didn’t like,” says Sacramento certified financial planner Elfrena Foord of Foord, Van Bruggen, Ebersole & Pajak. Her former client “gained independence because of the money. It opened up a new choice she didn’t have before.”
Even if leaving your spouse isn’t what you had in mind, an inheritance can generate a gamut of new possibilities, from the humdrum, like paying off the mortgage, to the glamorous: think luxury vacation homes, exotic treks across the globe, kissing the 9-to-5 grind goodbye.
As the parents of baby boomers head into their twilight years, their children are gearing up to receive the biggest generational transfer of wealth ever. (There is little agreement on the figure; estimates range from $25 billion to $41 billion to be handed down over several decades.) Indeed, large inheritances aren’t just for the offspring of Old Money types anymore. People who had lived otherwise middle-class existences are leaving tidy sums to their heirs.
Of course, some inheritors attest that their new riches didn’t bring them the carefree existences they’d dreamed of. With a sizable inheritance come new responsibilities and, in the worst cases, damage to personal relationships. Whether your inheritance brings you fulfillment or fretfulness depends in large part on how you manage the experience.
One strategy for guarding against problems down the road is to plan ahead by communicating about it openly—and with great tact. “You have to be really respectful,” cautions Susan Bradley, founder of the Sudden Money Institute in Palm Beach Gardens, Fla. and a nationally known expert on inheritance issues, when broaching the issue with parents. Bad: “So, how much dough do you plan on leaving me?” Better: “Is there anything you want me to know about your estate plan?”
If discussing a loved one’s demise is out of the question (attitudes on this vary widely among families—after all, who enjoys pondering his or her death?), focus on getting your own estate plan in order. Kay Brooks, an estate-planning attorney with Weintraub Genshlea Chediak in Sacramento, insists you don’t have to wait until you are grieving to plan for your inheritance.
“Estate planning is something most people don’t know about until there is a crisis,” says Brooks. “Get an estate plan set up for yourself, and then it’s so much easier to add onto it when the time comes.”
As tempting as it may be, learning that you have an inheritance coming should not send you rushing to the Porsche dealership (unless Nana’s dying wish was to see you behind the wheel of a cherry-red two-seater). For starters, you’ll probably be grieving the loss of the generous soul who left you the gift, which could cloud otherwise good judgment. There’s also the reality that estates can take many months, and sometimes years, to settle, so your spending spree could be premature.
“Most people don’t realize it could take that long,” says Brooks, who has seen hasty clients do things like rush to buy a new car as soon as they learn they’ve got money coming.
Do the Right Thing
As with any financial plan, it’s wise to ensure your long-term needs are funded before splurging on extras today. That means investing for your retirement years (including your health care needs) before anything else. Once you’ve got a sufficient amount squirreled away, you can fund your other priorities.
Whether it’s prudent to do things like pay off your mortgage, quit your job or donate a large sum to a special cause is a matter to discuss with a financial planner. Even a sizable bequest might not fund all your wants. As one inheritor with a $1 million-plus portfolio put it, “I’ve inherited just enough money to live on, but not enough to thrive,” noting that most of his neighbors sport nicer cars and clothing than he.
Be wary of friends and family who approach you for financial favors. Inheritance experts caution not to commit the money to anyone until you’ve educated yourself about the consequences of your decisions.
Brooks tells of one client who ignored her advice to let the money sit for a little while, giving away tens of thousands of dollars to family members, only to discover later that there were costly tax ramifications for the recipients.
It’s natural to want to share your bonanza with others, but get informed first. You may gift up to $12,000 per person annually (up to $1 million over your lifetime) before triggering the gift tax.
Although there is no inheritance tax under California law, federal estate tax is levied on estates valued at $2 million and higher. That tax is paid off the top, before disbursements to beneficiaries are made.
How taxes factor into your inheritance depends in large part on your particular pre-inheritance tax situation and what you inherit. Receiving a parent’s 401(k) in one lump sum, for example, might trigger a hefty tax. Likewise, you and your accountant will have to factor in the tax ramifications of actions like selling property.
Whether to add your spouse’s name to your new fortune can be another sticky issue, especially if you’re accustomed to maintaining joint ownership of all your assets. Under the law, anything you inherit is your separate property and doesn’t belong to your spouse unless you put it in his or her name.
“More often than not, it’s a sensitive issue,” says Brooks, who adds that it’s generally best to keep it separate. One benefit of doing so is that you can protect your inheritance in the event of a divorce. It’s possible to keep the inheritance as separate property yet include it as part of your joint estate plan.
Anyone who’s inherited knows that keeping the peace among family members can be trying. “Emotions are heightened and people act differently because of their grief,” Brooks observes of families settling estates. She says it’s important to “appreciate that it’s a tough time for everyone. Try to find some way to work things out before tension builds up.”
A family counselor can be extremely helpful when such friction arises. Ultimately, you have to decide what’s more important: the relationships or the money.
One Sacramento man convinced his mother to give a portion of her estate to his half-brother, the woman’s stepson. “I was very close to him and I couldn’t fathom getting everything while he got nothing,” he explained. “Now, I have created a will in which I will leave an inheritance to both my stepson and my daughter. I want them to be treated equally.”
Another local woman opted to forgo her stake of a lucrative farming operation rather than do battle with her brothers over how to divide things in a manner she thought was fair.
That’s not fair!
Of course, some situations may warrant legal intervention. “The person who is in charge of the estate has duties to act fairly toward all of the beneficiaries,” Brooks explains. “If you feel like you’re not being treated fairly, you should seek legal counsel. And it doesn’t have to be nasty to simply inquire about your legal rights.”
Are there ever instances in which it’s wise to decline an inheritance altogether? Yes, says Brooks, especially if inheritance triggers a tax burden that negatively affects your own estate. But you must decide whether to disclaim the inheritance before tax filings for the estate are due, nine months after the date of death.
“It’s like saying ‘No, thank you’ to the inheritance, and you can disclaim any portion,” explains Brooks.
It’s true that inheritance may come with some pitfalls. But when managed carefully, a loved one’s final bequest can change a family for the better.
“It can provide security and a sense of relief, because it can fill in some of those gaps that you worry about from your own income,” says Brooks. “You suddenly can pay off your mortgage, or you have money for your kids’ college education. It’s really a wonderful gift.”
Ingredients for Success
Sacramento financial planner Elfrena Foord says the most satisfied inheritors do three things:
• They take the time up front to discover what’s really important to them.
• They talk to professionals and get educated.
• They make a plan—and follow it.
Taking Action After You Inherit
Inheriting a windfall can be a confusing time. In the midst of coping with the raw pain of grief, you’re also handed the heady responsibilities of sudden wealth. Here’s what experts have to say about navigating this emotional and financial minefield.
First, do nothing. Create a “decision-free zone” for yourself, suggests inheritance expert Susan Bradley, founder of the Sudden Money Institute in Palm Beach Gardens, Fla. This means attending only to essential business, such as filing taxes, during the period of grieving and transition. Meanwhile, park the money in a secure investment, such as a money market account, until you’ve mapped out a plan. Bradley strongly cautions against making large purchases or financial promises to anyone in the initial months after receiving an inheritance. As she advises her clients, “Always test out an idea before voicing it.”
Round up a team. Professional advisers can guide you through thorny decisions and help you avoid costly mistakes. “I really like the team approach, where people are advising you on what they know,” says Kay Brooks, a Sacramento estate-planning attorney. Your core team should include an accountant, a financial planner and an attorney with experience in estate planning. You might also consult a family counselor or life coach to counsel you through the grieving process and the emotional complexities of inheriting.
Take stock of yourself and your portfolio. Do what Bradley calls “self-discovery work” to prioritize what is really important to you. Most people don’t inherit enough to fulfill every wish on their list, so focus on what fits your value system. If funding your kids’ tuition or paying off a mortgage is a must, you may have to forgo the vacation home. This also is the time to assess your pre-inheritance financial standing, including current debt, investments, retirement plans and taxes. Identify any weak spots in your financial plan, such as an underfunded retirement.
Make a plan and follow it. Once you’ve prioritized your goals, it’s time to create a strategy for how to fund them, a job that your advisers can assist with. This may call for rebalancing any investment vehicles you inherited, says Sacramento-based certified financial planner Elfrena Foord. “Usually what you inherit is not age-appropriate for what you need,” says Foord. The investment portfolio of a 90-year-old, for example, is probably not a good fit for someone who’s 55. Put your plan on paper and revisit it at least annually with your financial planner.
When a Bonanza is Bittersweet
Inheriting money hardly qualifies as a traumatic event in most people’s eyes. Yet some inheritors say that a sudden influx of cash can stir up a tempest of negative feelings that may sour relationships and squelch any joy the gift might have brought.
“The reality of it is actually very emotional and sad,” says Sacramento attorney Kay Brooks. “There’s this weird thing that suddenly you might get a bunch of money, but it’s because your mother died or your spouse died. It is very emotionally loaded.”
One Sacramento man, who requested that his name be withheld, says that his inheritance—gifts from his parents that today total around $1.3 million—was plagued with unexpected pitfalls, yet his situation elicited little sympathy from others. “People that I’ve tried to talk to about this, if I express any negatives, their attitude is, ‘What are you complaining about? You’re better off than 99 percent of the world.’ And they’re right. But at the same time, for me, there were all kinds of downsides.”
The man, who is in his late 50s, divorced and semiretired, describes how the money he inherited from his parents left him financially stable yet emotionally insecure, saddled with feelings of isolation, guilt and self-doubt.
“I would have made a better life for myself if I didn’t know this was coming,” he laments. “It sapped my initiative in some way.” He says he continually struggles with feelings of “admiration and fear and resentment” toward self-made people and guilt that his wealth is “undeserved.”
Another inheritor, a Sacramento mother of three in her 20s who asked to remain unnamed, says that the financial gifts left to her by her grandparents have opened up a world of opportunity for her family, including homeownership that would otherwise have been out of reach. Her grandmother, who is still living, contributes to the family’s income to the tune of $60,000 a year. And the young woman expects to inherit half of a $1 million-plus estate when her grandmother dies. Still, there were some bumpy episodes in the beginning.
“I felt like everybody was looking over my shoulder and watching what I was doing,” she says of receiving her inheritance at a relatively young age. “It was a lot of guilt, too: guilt that I have been so lucky.”
In some cases, talking to a mental health professional is warranted. An experienced therapist can help sort out the conflicting feelings that often accompany an inheritance. Find a trusted sounding board, yes, but refrain from confiding in friends in most cases.
“Unless they’re in the exact same situation, they’ll resent you,” says the man who inherited from his parents and learned this lesson the hard way. “They won’t like you as much and they won’t have anything to offer as far as good advice.”