It would be nice to believe that a financial windfall, such as winning the lottery or receiving an inheritance, is a silver bullet to solving all financial problems. However, history is filled with stories that prove this often is not the case.
One of the most high-profile examples is the sad story of Maureen O’Connor, a former California politician who inherited more than $40 million from her late husband, Robert O. Peterson, the founder of the Jack in the Box restaurant chain. She gambled it all away at casinos and was left destitute. O'Connor liquidated her savings, sold numerous real estate holdings and auctioned valuable personal items. To top it off, she misappropriated millions of dollars from her deceased husband's charitable foundation.
Other heirs have lost their fortunes to extravagant lifestyles, lavish gifts, multiple costly divorces and illicit habits.
If you believe you will receive an inheritance one day, it is important to know that a lump sum will present opportunities – but also some challenges. Here are some of the ways people mishandle a windfall and recommendations on how to best prepare yourself for an inheritance.
It’s Not Your Debt, It’s Your Spending
People often think an inheritance will solve their debt problems. Under a mountain of debt with steep interest rates and a barely manageable minimum payment, it seems reasonable to assume that a large lump sum would save the day.
However, debt is often a symptom of an underlying problem. Most consumer debt is incurred when spending exceeds income. Spending more than you make is not simply solved by making more money. We have seen people of all levels of financial means outspend their earnings. Unfortunately, this problem only gets more complex when the numbers are larger.
Years ago, one of our clients passed away, leaving each of her three children with millions of dollars. The two children who already had a healthy relationship with money, strong savings and reasonable spending habits invested their inheritances and continued to live life largely the same as before. However, the sibling with money problems eagerly paid off six figures of debt, immediately upgraded his lifestyle, and within 36 months found that his multimillion-dollar inheritance was almost gone already.
People who spend too much usually know it. If you do, begin working on your relationship with money now instead of waiting for an inheritance to save the day. Your attitude and decisions regarding money will impact you more than the numbers in your bank account.
You May Have to Wait Years to See a Dime
People are living longer these days, so you may have to wait a long time to inherit assets – into your 50s, 60s or even 70s. By that point, it may be too late. And a longer life means an aging parent will need more money for long-term care and other needs – so any inheritance may be less money than expected.
We have seen this happen firsthand. One of our clients thought they would inherit a large sum of money from their mother. But Mom ended up living past age 100 and needed around-the-clock care for the last 10 years of her life. By the time the funds were inherited, there wasn’t a whole lot left.
Fortunately, through careful planning and disciplined savings, this person got on track to be financially independent apart from the inheritance, which was key to their success. Relying on an inheritance to make a plan work is problematic since you never know what can happen.
What You Should Do If an Inheritance Is Imminently Coming?
If you know an inheritance is coming soon, start making a thoughtful plan. You may want to pay off your mortgage or other debts or use this newfound money to give more to charitable organizations and have an impact in your community. Having a plan, even just to save those funds, can prevent impulsive decisions that you later regret.
A financial adviser can help you navigate how to manage this windfall. With a sound plan, a person could retire earlier than expected. There may also be some tax-planning techniques or your own estate tax considerations to consider. You may also benefit by a plan to protect your assets, such as determining the correct amount needed for an umbrella insurance policy to protect against excess liability or putting a trust in place.
A Final Word of Caution – Don’t Do These Two Things
No. 1: Don’t advertise that you have this windfall coming. You probably do not want extended family or “friends” coming out of nowhere trying to make claims on your inheritance or trying to guilt you into giving them money.
No. 2: Don’t spend the money before you get it. It’s great to have goals for those funds, but make sure nothing has been implemented before the funds are received. Wait until funds are in your possession before putting your plan in motion.
Our experience has taught us that an inheritance is best thought of as the cherry on top rather than a lifeline to save the day.
Patricia Sklar is a wealth adviser at CI Brightworth, an Atlanta wealth management firm. She is a Certified Public Accountant, a CERTIFIED FINANCIAL PLANNER™ practitioner and holds the Chartered Financial Analyst® designation. Sklar uses her CPA and investment background to help develop and implement financial planning strategies for high-net-worth and high-income earning individuals.
Medicaid Managed Care Groups Under Congressional Investigation
Lawmakers question Medicaid MCOs over their high rates of prior authorization denials.
By Joey Solitro Published
Lawmakers Want the IRS to Crack Down on 'Wealthy Tax Cheats'
Tax Enforcement Lawmakers are urging the IRS to go after 1.4 million 'wealthy 'tax cheats' who haven’t filed federal tax returns.
By Katelyn Washington Published
Don’t Bet Your Retirement on Stocks: Follow These Four Tips
Keep a generous amount of your savings in the stock market, but make stocks only part of your retirement income plan to manage the risks.
By Jerry Golden, Investment Adviser Representative Published
If You Work in Retirement, Can You Save in a Retirement Plan?
Yes! Well, probably. If you meet the requirements, there are multiple retirement plans you can choose from.
By Evan T. Beach, CFP®, AWMA® Published
Are You an Emotional Miser With Your Employees?
Managers who show their appreciation have much happier workers. Some employees even rank appreciation above pay for job satisfaction.
By H. Dennis Beaver, Esq. Published
Too Heavy in Stocks? Annuities Could Be a Rebalancing Option
Annuities, especially multiyear guarantee annuities, offer a way for Baby Boomers to rebalance their portfolios, while providing good rates and tax advantages.
By Ken Nuss Published
Here’s How You Can Avoid Succession Drama at Your Company
Poor succession planning was at the heart of the HBO show Succession, but this financial advisory business owner is here to help you prevent that from happening at your business.
By Keith Ellis, Investment Adviser Published
Nervously Nearing Retirement? Four Do’s, Four Don’ts and One Never
With so many critical decisions to make and lots of opinions to consider, here are some common-sense tips to keep you on track.
By Thomas Diorio Published
You've Just Inherited an IRA: What Do You Do Now?
The rules on inherited defined contribution plans (not just IRAs) seem like a moving target, but here’s what you need to know (as the rules stand now).
By Evan T. Beach, CFP®, AWMA® Published
Five Tips for Becoming a Financially Successful Couple
Husband-wife financial adviser team practice what they preach, recommending lots of open communication and aligned priorities.
By Tim Schultz, NSSA® Published