It’s no surprise that many people who inherit millions of dollars don’t know what to do with their newfound wealth. The possibilities of becoming a multi-millionaire overnight can be overwhelming, especially during a time when most are mourning the loss of a parent or other loved one.
I often work with people of different age groups who have suddenly become rich through an exceptional inheritance. Although it is necessary to develop a comprehensive financial plan, it is 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 anticipate how they will manage their wealth, but the money has not yet arrived.
- They have their inheritance – often several million dollars – but they are still mourning the loss of a loved one and seeking advice on next steps.
- The inheritance has been in their bank account for a long time, but they still lack direction and cannot make any decisions.
It is important to listen to everyone’s personal story with financial windfall. Losing a significant person in your life is difficult, and reflecting on the impact that person has had is just as important. Many people express a desire to do something to honor a parent’s wishes.
Knowing how to make the most of an inheritance
Here’s how I typically approach these conversations to help someone make the most of their legacy:
Define their relationship with money. I begin by asking about the role money played in their childhood and how it shaped their relationship with money today. For many families, money has been taboo and rarely discussed for generations. For others, it was discussed openly, but perhaps because there was never enough. Now their newfound wealth makes them feel like they can have everything they ever wanted, or maybe they feel like they have to keep it for the next generation.
It’s not uncommon for someone who’s been told there’s never enough money, or who’s been planning on getting some for a long time, to do something rash. But this behavior can quickly put their long-term financial well-being at risk. Understanding each person’s relationship with money helps establish a baseline for a solid financial plan.
Discuss their goals and dreams. It is important to allow a person to speak openly about how they wish to use their inheritance. Most adult children understand that their parents worked their whole lives to generate their wealth, so they may be afraid of losing the inheritance.
To help them start setting goals, here are the three most important questions I ask:
- Are there any immediate purchases you want to make? These could be home improvements, a new car, a second home or travel plans.
- Do you have any assumptions about who should get some of that money? It can be a sibling, child, parent, church or other organization.
- If you spend all the money, is that OK? Or would you feel like you didn’t honor the person who left you the money?
To create a truly personalized, comprehensive financial action plan that aligns with a person’s emotional and psychological well-being, it’s important to explore expectation management. A discussion of the above three questions often helps my clients understand the possible uses for their money. And it allows us to better understand assumptions about who thinks they should get some of the money.
Don’t hand over your money right away. It usually doesn’t take long after a relative’s death that family members, friends, and others begin asking for a share of a person’s inheritance. Many family members or a local church or other community organization may believe they are eligible to receive some of the money.
I strongly advise my clients to avoid giving money, even to family members, until a financial plan is in place. If they receive a request, I ask them to provide this response:
“I am now working with a financial planner 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. Adopting this position prevents a person from making irreversible decisions that can jeopardize their future.
Development of a plan adapted to your needs. Once a person has answered the emotional questions about what to do with the inheritance, I can start creating a personalized financial action plan.
Educating people about their newfound wealth is part of this process. For example, some do not realize that they may owe several hundred thousand dollars in taxes as part of their inheritance. Since each person’s level of financial literacy is different, it is essential to explain the plan in layman’s language. Even astute people can be confused by the tax implications of an inherited IRA.
It is important to be familiar with potential lifestyle changes
My ultimate goal is to help the person or couple inheriting the money feel comfortable with their newfound wealth and the lifestyle changes it will bring. Once they have taken the time to discuss their relationship with money and the impact their loved one has on their life, 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 account your personal situation and that it is important to consult a duly accredited professional before making any financial, investment, tax or legal decision.
Erin Hadary is a CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional and Partner at Moneta. Based in Denver, CO, and serving domestic and international clients, she specializes in financial planning for life transitions, including retirement and sudden wealth. When someone inherits a large sum of money – often referred to as “sudden wealth” – they are often overwhelmed and getting help with personal financial planning can be life changing. Erin has over 15 years of experience in global wealth management and personal finance. In addition, she has expertise in the management of individual and institutional investment portfolios and in philanthropic advice.