How to Deal With Inheritance


Most people get squeamish when they start thinking about either inheriting money from their parents or setting up a way to funnel an their own money down to their their children. It's entirely natural because by making plans around inheritance, it can feel that in some way you're acknowledging the future passing of yourself or a loved one. 

However, it's necessary to have those conversations because simply avoiding them won't make them go away, and in the US, they're currently set to accelerate as baby boomers are on track to inherit an estimated $8.4 trillion.

Of that $8.4 trillion, they've already received about $2.4 trillion, with another $6 trillion yet to be distributed, according to the Center for Retirement Research at Boston College. This means that the average household will inherit about $300,000, while the wealthiest 10% of households would inherit nearly $1.5 million. 

Of course, not everyone will inherit such large sums, but still - you get the point.

So how can you set yourself up to make the most of your inheritance gift and make smart choices? 

1. Don't do anything foolish

One of my favorite anecdotes as a money manager is this: Do you know how long it takes the average person between the time when they receive their inheritance and the time when they decide to buy a new car?

The answer: 9 days.

I'm not sure of the source of that often-repeated statement, but it holds enough truth that most people can identify and relate to it. So before you do anything - just do nothing for a while.

And if you do decide to buy a new car, first pay off the loan on the old one, trade it in, and then use the money you were paying the loan down with to put towards your retirement. So rather than having an old car that you pay $400 a month for, you'll now have a new car and be investing that $400 a month into a retirement account. 

2. Make smart choices

So, what's the right course of action? First, take a look at your financial life and assess where you currently are, such as if you already have enough money for your retirement? To put your kids through college? If you aren't particularly well-off and are worried that you might spend the money too quickly, you can always look at an immediate fixed annuity, which would pay you a set amount for life, or speak to a financial advisor about your best options.

In terms of generic choices, pay down high-interest debt, like credit cards and set up a 6-month emergency fund cushion, which is kept in safe, easy-to-access investments in the event, for example, that you lose your job and need to move across the country.

3. Understand the emotional connection

If you were to look at two groups of people who had just had a large $1 million windfall, but one group won the lottery, while the other group inherited the money from their parents, you'd find that the two groups would behave very differently. The group who had won the lottery would have an easier time, in general, spending the money, whereas the other group would have a greater emotional attachment to the money.

Often, we'll see clients that will want to either: i) not touch their inheritance because they don't feel that it's their money, or ii) will want to spend the money in a way they think honors their parents.

Both of these are reasonable responses, and it's fine to do what your parents would have wanted; but it's also important to think about if it's what you want also, and if it makes financial sense to you and your family.

4. It can get complicated

Estate issues are rarely straightforward, and there are usually a lot of caveats that can accompany estate planning. For example, know that most people don't get an inheritance until the death of their surviving parent, and as many people are living into their 90s and beyond now, it's unwise to make expectations around receiving an inheritance.

Also, depending on the investment vehicle you are inheriting, there are different rules and regulations that can be applicable. For example, an IRA will make you start withdrawing money immediately, but you'll be taxed on the withdrawals. To counter this, you'll want to think about converting it into an Inherited IRA or to limit the amount you withdraw to the minimum required. If it's a Roth IRA, you'll still be required to make withdrawals from the account, but they won't be taxable as they've already been taxed.


As always, if you feel like you need advice on what to do with an inheritance you've received or how to structure one for your heirs, we are a fee-only, fiduciary investment advisor and would be happy to give you some free advice. You can reach us here