Suddenly Inherited Money? The Critical Steps You Need to Take First
What you should do with an inheritance, even if it comes at the worst possible time.
Lately, I've been getting a lot of news releases about what's being called the Great Wealth Transfer — upwards of $124 trillion that could change hands between generations over the next 10 to 20 years. And much of that inheritance will likely end up in the hands of women — wives, daughters, siblings, granddaughters — if for no other reason than women tend to outlive men.
But before you count on that cash, a word of caution is in order. "I have been hearing about a generational windfall for the last 30 years, and I haven't seen it materialize," says Alexandra Armstrong, a certified financial planner and author of On Your Own: A Widow's Guide to Emotional and Financial Well-Being. She has worked with clients who counted on inheriting from their parents, only to find that "their parents didn't die anytime soon, and there wasn't that much left anyway."
"What gives me pause is the combination of longer life spans and the cost of medical care," says Elizabeth Zelinka Parsons, a lawyer and author of Encore: A High Achiever's Guide to Thriving in Retirement. "I certainly would not suggest that clients build an inheritance into their financial plan."
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At the other end of the spectrum, "30% of people who inherit money have basically spent their inheritance within a year," says Natalie Colley, partner and senior lead adviser at Francis Financial in New York City. "For people over age 50, that jumps to 40%."
One problem, she says, is that people often receive an inheritance at "possibly the worst time of their lives." Not only are you likely to be grieving the loss of a family member, but you might also have feelings of guilt or resentment and be faced with managing your new financial situation. "Avoidance is a common reaction," says Colley.
On top of that, navigating the legalities of taking possession of an inheritance can be daunting. "Even people who are savvy with financial matters have trouble with this," says Parsons. "Inheriting is a lot of work."
Where to start
To make the process as smooth as possible, Parsons gives her clients a road map. For the first 30 days, she says, "just catch your breath" and use that time to get all of your documents in order. For example, you would need copies of any will, trust, or estate plan that exists, as well as account statements for all assets, plus any insurance policies, loan documents and real estate deeds. And get at least six copies of the death certificate.
You need to come up with an inventory of everything you have received and the value of those assets, which will determine whether the estate or trust has a tax liability. Your lawyer should be able to help you, and you also might want to consult a certified public accountant or other tax professional or a financial adviser. If you have a clear picture of your inheritance after 60 days, "you're in good shape," says Parsons.
One issue you might face is getting access to certain assets. For example, if your husband had a bank account in his name, with no joint ownership or pay-on-death provision, you might need a court order to access it.
Depending on what you've inherited, you may also be responsible for certain ongoing activities. With real estate, for instance, you may have to make mortgage or tax payments or create a maintenance checklist.
Any planning you can do in advance — say, between two spouses or between parents and adult children—can make the whole process go more smoothly. "Sit down once or twice a year with your spouse to go over your accounts and how to get into them," says Parsons. "Become as literate as you can before there's a compelling need."
Janet Bodnar is editor at large of Kiplinger Personal Finance. Contact her at janet.bodnar@futurenet.com
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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