5 Steps to Successfully Handling an Inheritance

“I never realized mom had this much. I have never seen this much money before much less handled it. I have no idea what to do.”

It is not a problem most people anticipate but many advisors hear something like this at least a few times in their careers. Receiving an inheritance can be a beneficial outcome associated with a great personal loss. And it can be the source of significant stress during an already stressful time. It holds the possibility of changing your life if handled well but making good choices in the fog of grief and unfamiliar financial circumstances can be an enormous challenge. That’s one reason why, according to Jay Zagorsky, a researcher in the US at Ohio State University, half of money received through moderately large inheritance is blown on spending or bad investments soon after it is received.[1]

Receiving an inheritance can be a life-changing event. Reacting to it too quickly and making poor decisions can compromise the good it can do

You may face this problem if you have aging parents. According to the 2017 household balance sheet report published by strategic insight, there were 2 million households in Canada with at least one family member over the age of 70 that collectively control $860 billion at the end of 2016. They project $1.05 trillion will be inherited in the decade between 2016 and 2026.

How can you make sure you avoid some of the biggest mistakes if you find yourself in the position of receiving an inheritance?

  • Do nothing – One of the smartest things you can do is to avoid making any decisions until you can grieve and get used to how your life has changed. Susan Bradley, founder of the Financial Transitionist Institute and author of Sudden Money: Managing A Financial Windfall (Wiley 2000) calls it a “Decision Free Zone.”[2] many experts recommending waiting six months or even a year before making any significant financial decisions.
  • Fund an emergency account – if you don’t already have one, set aside three months expenses in a bank account to avoid having to liquidate investments or borrow money to cover any unexpected expense.
  • Create a list of goals – before making any specific investments or large purchases, consider what you want in the long term. Invest some time developing a vision of the life you want down the road.
  • Write a financial plan – develop a coherent strategy for how you want to get where you want to go. Any significant purchases or investments can then be made in a meaningful context.
  • Get some professional help – suddenly having to manage significantly more than you have before, handling taxes, and planning your own estate calls for outside experts. The right accountant, lawyer, banker, and financial advisor can help you make sure the decisions you make are sound.

Receiving an inheritance can be a life-changing event. Reacting to it too quickly and making poor decisions can compromise the good it can do and even dishonor the person who left it to you. As financial advisor and radio personality Dave Ramsey said, “I always encourage inheritors to think about all the hard work and sacrifice that went into making that inheritance possible. We’re talking about a person’s legacy here!”[3]

[1] https://www.springer.com/about+springer/media/springer+select?SGWID=0-11001-6-1367721-0

[2] https://financialtransitionist.com/widows-and-decision-free-zones/

[3] https://www.daveramsey.com/blog/what-to-do-inheritance

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