Investor Education | I’ve Inherited a Lot of Money. Now What?

First, put all major decisions on hold. A financial planner can help you come up with a plan that addresses your goals, dreams and needs.

It’s no surprise that many people who inherit millions of dollars are uncertain about what to do with their newfound wealth. The possibilities of becoming a multimillionaire overnight can be overwhelming, especially during a period when most are grieving the loss of a parent or other loved one.

I often work with people in many different age groups who have suddenly become wealthy as the result of a windfall inheritance. While there is a need to develop a comprehensive financial plan, it’s not the first step. Instead, I try to determine each person’s starting point with money. Many people fall into one of three categories:

• They are anticipating how they will handle their wealth, but the money hasn’t yet arrived.
• They have their inheritance — often several million dollars — but they are still grieving the loss of a loved one and are looking for guidance on next steps.
• The inheritance has been in their bank account for a long period, but they still lack direction and can’t make any decisions.

It is important to listen to each person’s personal story with a windfall of money. Losing an important person in your life is difficult, and reflecting on the impact that person made is just as important. Many people express a desire to do something to honor a parent’s wishes.

Figuring out how to make the best use of an inheritance

Here is how I generally approach these conversations to help a person make the best use of their inheritance:

Define their relationship with money. I start by asking about the role money played in their childhood and how it shaped their relationship with money today. For many families, money is a taboo topic and rarely discussed for generations. For others, it was discussed openly, but maybe because there never seemed to be enough. Now, their new wealth makes them feel like they can have everything they’ve always wanted, or maybe they feel they must save it for the next generation.

It’s not uncommon for someone who was told there was never enough money, or who has anticipated getting the money for a long time, to do something rash. But this behavior can quickly endanger their long-term financial well-being. Understanding each person’s relationship with money helps set a baseline for a sound financial plan.

Discuss their goals and dreams. Allowing a person to talk openly about how they may want to use their inheritance is important. Most adult children understand their parents worked a lifetime to generate their wealth, so they may be afraid of losing the inheritance.

To help them begin to set goals, here are the three most important questions I ask:

• Are there any immediate purchases you want to make? This could include home improvements, a new car, a second home or travel plans.
• Do you have any assumptions about who should receive any of this money? This could include a sibling, child, relative, church or other organization.
• If you spend all the money, is that OK? Or would you feel you didn’t honor the person who left you the money?

To create a truly customized comprehensive financial action plan that fits with a person’s emotional and psychological well-being, it is important to explore managing expectations. A discussion of the three questions above often helps my clients understand possible uses of their money. And it provides us with a better understanding of assumptions around who thinks they should get some of the money.

Don’t gift away your money just yet. It’s usually not long after a parent’s death before family members, friends and others begin asking for a slice of a person’s inheritance. Many family members or a local church or other community organization may believe they are eligible to get some of the money.

I strongly advise my clients to avoid giving away any money, even to family members, until a financial plan is in place. If they get a request, I ask them to provide this response:

“I’m working with a financial planner now to prepare a personal financial plan and make the best decisions on how to use this money. Once I’m organized and have a plan, I’ll get back to you.” Taking this position prevents a person from making irreversible decisions that can jeopardize their future.

Developing a plan to fit your needs. Once a person has addressed the emotional questions around what to do with the inheritance, I can begin to create a custom financial action plan.

Educating people about their new wealth is part of this process. For example, some don’t realize they may owe several hundred thousand dollars in taxes as part of their inheritance. Because each person’s financial literacy level is different, it’s critical to explain the plan in layman’s language. Even astute individuals can be confused by the tax implications of an inherited IRA.

Getting comfortable with potential lifestyle changes is important

My ultimate goal is to help the person or couple inheriting money to become comfortable with their new wealth and the lifestyle changes it will bring. Once they have taken time to discuss their relationship with money and their loved one’s impact on their lives, we can develop a plan to help them be financially independent for life. Keep in mind that the information shared here does not take into consideration your personal circumstances, and it is important to consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision.

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Investment Assistant Kristi Remus