How to Make the Most of Your Inheritance, No Matter the Size

Peter Bennett

By , Staff Writer
Posted on Thu Jul 17, 2014, Last Updated on Mon Aug 25, 2014

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After penny-pinching and living paycheck to paycheck for years, you get a call informing you that you’ve inherited $1 million or $100,000 or $50,000 or even $5,000. Does it really matter how much? The key point is to make the most of your inheritance, regardless of the size.

How to Make the Most of Your Inheritance, No Matter the Size

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This challenge is not as far-fetched as you think. While only one in about 80 million can count on winning the Powerball lottery, about one in three people can expect to receive an inheritance, according to the Bureau of Labor Statistics. Indeed, various wealth management organizations, institutes and think tanks that track the flow of money say the United States is undergoing the greatest transfer of intergenerational wealth in its history — a sum estimated in the trillions of dollars.

Instant Inheritance also known as Sudden Wealth Syndrome

But with instant wealth also comes a new set of challenges. There’s even a name for this life-altering event, called Sudden Wealth Syndrome or SWS. Essentially, it means you’re having issues dealing with your new status — going from Joe Schmo to Jay Gatsby practically overnight. Symptoms include anxiety, sleepless nights, visions of a life spiraling out of control and a host of other conditions ranging from giddyness to guilt (why am I suddenly rich?).

Another nagging emotion at the center of SWS is fear, and its annoying cousin, paranoia. No doubt,  you’ve heard of lottery winners blowing their windfalls in months, if not weeks, launching unbridled spending sprees on luxury homes, cars, yachts and other trinkets favored by the rich and  famous. You don’t want to fall victim to these same perils and pitfalls. Instead of squandering and frittering away your “fortune,” you’d like to know it might still be around in a decade or longer.

Fortunately, there are some answers, solutions and strategies to keep you from feeling so overwhelmed and stressed out. If you plan correctly and take a few deep breaths, your bonanza doesn’t have to become a burden. Rather, it can be that rare opportunity in your life to rethink, rebalance and re-energize your future.

An inheritance requires patience and planning

At such a critical juncture in your life, defeat the urge to launch into a series of impulsive decisions. Declare a moratorium on any decision-making for six months, a year, or longer. Setting aside this time might be more difficult than you think. According to Oppenheimer Fund’s Money’s Worth survey of baby boomers, one-fourth of those who had received inheritances took less than a week to decide what to do with the money.

If you can resist this hair-trigger response, however, you might be far better off, financially and psychologically. Use your “honeymoon” period to improve your financial literacy and emotional stability, which means scheduling fact-finding visits and interviews with a host of people, ranging from financial advisors to therapists… yes, therapists. In fact, many wealth management companies employ such experts to help their financial advisors recognize and empathize with SWS clients who are having trouble coming to terms with their new wealth. The thinking goes, it’s more important to get your head on straight than the numbers straight.

During your period of transition and adjustment, there’s another key tactic to observe: Keep news about your windfall a tightly guarded secret. By keeping your new status private, you might be able to delay a horde of solicitations from people, both relatives and outsiders, who believe they have better uses for your money than you.

As for what to do with your money while you begin pondering your options, park it in a savings account, perhaps with an online savings institution that typically offers higher interest rates than your local brick and mortar branch.

Some things, however, can’t wait!

Although you’re in a state of transition and have bought yourself some time, there are some matters, such as the Internal Revenue Service, that can’t wait. It’s likely that the estate from which you received your inheritance has paid taxes, but once the money is in your possession, it can easily trigger taxable events. Because the rules are often complex, it’s best to see counsel from a tax expert.

Another “to-do” on your “A” list is contacting your insurance specialist. Your new wealth could make you an easy target for a lawsuit, so ask your agent to increase your personal liability limits on your auto and home insurance, sometimes called an umbrella policy. Typically, rates runs about $250 for every $1 million in liability coverage.

Once you feel as if you’re in a safe place with your emotions and have equally dealt with any pressing tax and insurance issues, you might feel you’re now ready to square off against the 800-pound gorilla in the room — the financial legacy you’ve been left.

Take a small bite of the apple

Again, despite the enormity of your task, don’t rush into things or make any rash decisions. There are some baby tasks you can take. For instance, pay off any high-interest credit card debt. Few investments you make will rival the interest you’re now paying on your current balance.

Now the fun part! Many money managers and financial planners recommend that you spend 10 percent on yourself before saving and investing the rest. And why not? It’s likely that the person leaving you the money wanted you to enjoy at least some of it, and not do everything by the book.

Live for today or live for tomorrow?

At some point, you’ll want to sit down with a trusted money manager, wealth advisor or money manager to help you develop a real game plan for your money so that you can preserve it and even help it grow. For a list of financial advisors, consult the National Association of Personal Financial Advisors at NAPFA.org.

Let the following example show you the wisdom of a trusted financial pro explaining your different options:

Inheritance Scenario One

You inherit $95,000, allocating the sum as follows:

$ 6,000      Pay off credit card debt

$45,000     Add swimming pool and spa to home

$25,000    Purchase new boat

$12,000    Start 3 college funds for your kids

$ 7,000    Incidental expenses

Inheritance Scenario Two

You inherit $95,000, allocating the sum as follows:

$ 6,000    Pay off credit card debt

$89,000   Invest at 10 percent

After 20 years in Scenario Two, you will have earned $775,000 from your investment!

Your investment professional can plug in various numbers that seem the most realistic for your particular situation. The upshot is, these scenarios will better equip you to make the most of your inheritance. Whether you want to be spendthrift or a steward of your money, that’s entirely up to you.

Receiving an inheritance can be a liberating force and true turning point in your life. Perhaps, you could use the money to go to graduate school, pay off student loans, make a down payment on a home, start a college fund for your kids, take a road trip, start a business, expand your financial safety net … the possibilities are endless.

The bundle of cash that landed in your lap may come wrapped with a set of new problems, but these challenges are not insurmountable. Ultimately, your inheritance can be that rare opportunity to finally take control of your life.

 

Post a Comment

  • RC

    I personally like to pay off debt if I receive a windfall of cash or inheritance.

    If the interest rate I am paying on the debt is higher than the rate of return on CDs and Money Market accounts that are currently available, it is a no brainer if I don’t need the cash for anything else.

    And you can’t put a price on the piece of mind it gives you knowing you are debt free or close to it!

  • highinterest

    I received a “windfall” inheritance nearly five years ago. I paid off all my debt first, started investing slowly, kept a lot in money market accounts. Bought a mid-priced domestic car a year later. Kept investing. Fully funded my IRA every year. Never have gotten around to buying a house. Allocated some cash to “mad money”, largely some trips to Vegas. I don’t touch the basic investments, the CDs, the IRA. Pay off all the credit cards every month, usually under $1,000 total.

    Had I received this money when I was younger, I’d probably blow it all, but I’m old enough to have modest wants and few needs. I agree with RC–having no debt is great for one’s peace of mind.

  • Peter Bennett

    At some point, I believe you have to reach out to an investment professional. The example in the article on how just $89,000 invested can turn into more than a quarter of a million dollars in just two decades really drives home this need. But when choosing and drawing up an investment plan, it’s probably best to use a fee-only advisor; this way you know he/she won’t be driven by commissions by churning your account. Unless you’re the world’s greatest money manager, at some point you need to build a team you can trust!