Sweeney & Michel, LLC | Chico, CA

View Original

Inheritance Opportunities and Pitfalls

Receiving an inheritance can be complicated. It can come along with feelings of sorrow and bitterness of losing a loved one. It can cause division within families, or the windfall can turn long term desires into reality.

Sometimes, heirs want to place extra sentimental value on the money in order to preserve it like a family heirloom. Other times, it’s seen as an immediate remedy to financial ailments, and in far too many cases, it’s spent frivolously like found money.

We’ve helped plenty of clients through the process of inheriting money and deciding what their best uses for it may be. Below are some of our coverall thoughts on the matter:

The financial need, not want, most families have

Inheritance can be a major opportunity for an individual; According to the polls, the average American family is in poor shape for retirement, carries credit card debt, and has virtually no rainy day fund. An inheritance allocated wisely can go a long way towards shoring these financial issues up.

Unfortunately, the statistics show that most people who inherit money spend it rather quickly and frivolously, and that money never makes it to a third generation. It’s very tempting to increase your lifestyle to match your new funds (until they run out). The old joke that the beneficiary drives a new car to the funeral isn’t too far from reality for a lot of folks.

Allocating the inheritance (i.e. paying debt, making investments, setting aside funds for others, and spending)

Ultimately decisions about inherited money should be about increasing a families’ net worth. The big picture focus should be

1. Decreasing expenses

2. Increasing income

This can mean paying down high-interest debt like credit cards, auto loans, or home equity lines might be a priority, as the interest expense on debt can compound faster than investments. If the bad debt is gone, make sure you’ve got an ample rainy day fund to protect against unforeseen expenses. Finally, seek to maximize investments that can earn passive income for you.

For individuals receiving a large inheritance, it’s ok to get in touch with your feelings first

Most of the thoughtful individuals we work with take time to understand where the money comes from- They have a level of respect for what it took for their loved one to save and earn it. We’ve had conversations with people who repeatedly say they want to honor the deceased and don’t want to blow the wealth it like a typical lottery winner. With this mindset, they tend to spend it more carefully and prioritize setting themselves up for the future through investment.