Thanks for coming back to read Telos Financial’s blog all about different financial planning topics. The purpose of the blog is to introduce financial planning concepts that I come across in my day to day work. I want to start discussions about that will educate, benefit, and improve your financial life. Ultimately, to help you focus on your telos!
So, you’re expecting a large inheritance and you want to be prepared. Here are some tips that I think will help you through the process. Three things: don’t be so sure, prepare & educate yourself, and don’t base your life on it.
First, don’t count on it. Depending on the situation, inheritances vary in their degree of certainty. Maybe your parents have money and they’ve promised it to you, or a life insurance policy with you listed as primary beneficiary, or you have a distant uncle who’s always been generous. There are a lot of things that can derail someone’s plans to pass along funds to the next generation.
One of the biggest risks today is a long-term health issue that requires extensive care and attention. Life expectancy continues to increase and with it, people are able to live longer sicker. Someone with Alzheimer’s or dementia can live for tens of years, but require extensive, expensive care. Depending on where the care is received, it will cost thousands each month. In my area, Southeast Michigan, the average cost for full care is around $8,500 per month or $102,000 per year. You can do the math on how quickly that will deplete assets. This isn’t to say you won’t inherit some funds in these situations, but it may be much less than you or your benefactor expected.
Some other things that can alter plans to pass funds along are living longer and remaining healthy. If your uncle expected to pass away at 70 and lived well to 85, he may have spent more of his assets than he planned. There are sundry elements that can change plans, financial mismanagement, maybe they became ultra conservative and inflation eroded the spending power of the assets. Maybe their definition of a lot and yours are different. My point is, there are very few guarantees with these types of wealth transfers.
Next, prepare and educate yourself. Let’s say you are in a situation where you’ll be inheriting assets. You want to do all you can to learn about the accounts. If it’s coming from a close relative, this should be easier, if not, you may not be able to learn anything. The best case and easiest solution would be if you can get account statements and review with your financial advisor to establish a plan.
Some helpful information to obtain is how the accounts are titled and what type of accounts they are. Are they IRA, Roth IRA, in a trust, jointly titled, beneficiary IRA, etc.? The account type, titling, and beneficiary dictate how you will pay taxes on the funds when you take them from the accounts. Who is the custodian? Are the funds held at a bank, online trading service, with a financial advisor, in an annuity, etc.?
The more information you have, the easier it will be for you or your advisor to execute the wealth transfer when your loved one unfortunately passes away. It is common that individuals who are beneficiaries of inheritances will learn about accounts for years following the passing of their loved one. If there are assets or accounts you don’t know about, how will you claim them?
Lastly, don’t base your life path or lifestyle upon receiving this inheritance. As I previously stated, the degree of certainty that you’ll actually receive something is debatable and situational. You should still save for your own retirement, emergency fund, college savings for your kids, etc.
Let’s say you know with absolute certainty a large inheritance is coming, but Aunt Tina doesn’t pass away at 80, she lives until 105. If you counted on retiring at 60 on this inheritance, in this case, you’d have to wait until age 85 now. It’s not a good strategy.
Next, when you do receive the funds, it can create a dramatic change in lifestyle. I cannot recommend working with a financial advisor enough in this situation. You need a trusted advisor who can help moderate the desires to buy all the things you want, spend all of the money, and end up worse off than you were originally. Beneficiaries may encounter substance abuse, families destroyed over trivial disputes, and dreams washed away from inheritances and irresponsible spending.
It is really difficult to resist the temptation to spend. When you receive an inheritance, you need to have a financial plan. This gives the map for what you can spend enough and achieve your goals. You don’t want to overspend, but you also want to make sure you’re not unnecessarily sacrificing your lifestyle because you’re afraid to lose it. Having a financial plan gives you the confidence that you’re spending within your means and you know what you need to do to achieve your financial objectives.
So that’s it! Three suggestions to help you deal with an expected inheritance: don’t be 100% certain of receiving the funds, prepare and educate yourself, and act reasonably after you’ve received it, I recommend a financial plan to guide this. If you expect to receive an inheritance, contact me and I would be glad to discuss specific steps you can take to prepare and ultimately receive an inheritance.
Telos Financial is a Michigan’s financial advisor for Xennials, Millennials, Generation Xers, young professionals & their families. It is a fee based holistic financial planning firm providing financial advice, wealth management, and related services. Dennis LaVoy, CFP®, CLU® founded Telos Financial and uses his experience, knowledge, and expertise to serve his clients as the financial advisor for Ann Arbor, Detroit, and across the country to help achieve their goals through financial management.
The views expressed are my own opinions and do not apply to every situation. Your situation may vary so make sure to consult a professional for advice prior to making any decisions.