When ‘mom’s money’ becomes yours: How to manage an inheritance
Michael Hay knew his mother was financially secure, but he didn’t fully know her situation until she was admitted to a hospital in August and he was granted her power of attorney. Even then, it wasn’t until his mother’s death, about a month later, that Hay understood that he and his two sisters were about to inherit a sum that would make a real difference in their lives.
Nine months later, Hay, 47, says he’s still processing the shock of suddenly losing his 78-year-old mother while gaining an inheritance he wasn’t prepared to receive.
“I still call it ‘my mom’s money’ even though it’s legally in my name,” said Hay, who works at a tech startup and lives in Madison County, New York.
Hay’s reaction to his sudden wealth is not unusual. “It is a big shock both emotionally and financially,” said Kathryn Kubiak-Rizzone, founder of About Time Financial Planning in Rochester, New York. She recommends that beneficiaries not make any financial decisions for the first six months because they’re likely to still be grieving.
Research shows that more adult children may find themselves unexpectedly inheriting wealth over the next two decades. The Silent Generation, or people born roughly between 1928 and 1945, and its successors, the baby boomers, are expected to transfer significant wealth to members of Generation X and millennials over the next 20 years, according to the Wealth Report, a publication from Knight Frank, a London global property consultant.
Federal Reserve figures show that half of all inheritances are less than $50,000, but with boomers reaching 80 and beyond, members of their family may begin to inherit more wealth. More than half of millennials who are anticipating an inheritance from their parents or another relative expect to gain at least $350,000, according to a survey by Alliant Credit Union in Chicago. (Whether they actually receive that much is another question.)
An inheritance can feel like a gift, but it can also create stress, particularly for younger heirs. Many millennials lack the financial education to manage a large inheritance, said Katherine Fox, founder and adviser at Sunnybranch Wealth in Portland, Oregon, and they typically don’t have a financial adviser to help them.
“I see a wide variety of preparedness levels, but an overwhelming majority are totally unprepared to inherit and, when money actually comes, don’t know what to do,” said Fox, who works exclusively with inheritors between the ages of 25 and 55. In these cases, millennial heirs are essentially trading one set of stressors — not being able to save money, not being able to buy a home and not preparing for retirement — for a new set of stressors related to managing the money.
“I’ve seen people become paralyzed by the money they inherited and burden of it because they want to make sure they steward it and grow it,” Fox said. Inheriting significant wealth at a relatively young age can give someone an incredible advantage that few people have — but for many inheritors, there is a fear of failure and losing something they didn’t earn.
Occasionally the opposite occurs and an early inheritance — before age 50 — gives a false sense of financial security.
“Sometimes it can have an adverse effect where folks take their foot off the pedal in terms of their goals and ambitions,” said Noah Damsky, a principal at Marina Wealth Advisors in Los Angeles. It depends on the person, he said: Some view the money as a cushion for a rainy day rather than an opportunity to buy a new Porsche and take a long vacation.
The reality is that few people inherit enough money to allow them to stop working. “Think of it more as a safety net and not the answer to everything,” Kubiak-Rizzone said.
Hay and his wife plan to use his inheritance to achieve several goals. Some of the funds will help send their three children to college, while a portion will go to their retirement savings. The inheritance also enabled the couple, who had wanted a new home, to buy a larger one than they had planned, and more seamlessly — the extra funds meant they didn’t have to rely on selling their current house, Hay said.
How to tackle a sum
Most inheritors use their windfall to buy or upgrade a home, set up college funds for their children or pay off a large debt, Fox said. Any leftover money is typically saved for retirement.
Fox recommends that her clients follow certain guidelines, regardless of the size of the inheritance.
■ Spend 3% to 5% on something you really want. “This is free money, so do something that makes you happy and is fun,” she said. If you were close to the person who died, consider buying something that reminds you of him or her or that you know the person would have liked for you to have.
■ Give 3% to 5% to charity. “Recognize your privilege and pay it forward,” Fox said. Consider donating to a charity that would honor your loved one. Hay and his sisters donated to the Massachusetts Audubon Society because their mother was an avid birder.
■ Think carefully about what you do with the remaining 90% to 94%. “You need to focus on your greatest financial needs,” Fox said, such as paying off a student loan or making a down payment on a house.
It’s important to take a longterm view, Fox said. For instance, if you use the bulk of the money to pay off a large debt, that will free up money to save for retirement. “Whatever you spend your inheritance on could change your life decades into the future,” she said.