Inheritance Money: Family money, passed down, may be your last, best shot at living well when you retire.
Many young and middle-aged people have a single retirement strategy: inheritance money from their old folks or a trust fund. Who doesn’t like getting free money?
But it’s no surprise that problems dealing with inheritance money is one of the most popular topics handled by financial advisors.
There are all those tax and legal issues of handling a windfall and of course, investment decisions to be made.
Then there are the less serious aspects of coming into inheritance money such as guilt, confusion, and illusions of grandeur.
That’s not an unreasonable idea in itself to inherit money or property. The older generation of the society today holds a vast amount of wealth. Therefore their beneficiaries feel somewhat entitled to an inheritance money of some sort.
But the million dollar question is how well will these heirs manage their windfall?
PROBLEMS WITH HANDLING INHERITANCE MONEY
Many are perplexed after having recently received an inheritance money. They have never had money to invest and are completely at a loss.
Even more experienced investors are thrown into despair after being left with huge inheritances. They try to manage that portfolio, as well as the many other business portfolios on their hands. A lot of them have rightly cried out “needing advice.”
Unprepared or uneducated heirs are susceptible to all sorts of afflictions concerning inheritance money, including impulse spending, loss of identity and guilt over receiving money they feel they didn’t earn.
Most times, the important thing to have in mind is how to make this money work best for you while putting into consideration, other issues.
This means considering tax issues, increased cost bases, and even the emotional attachment you may feel to your benefactor who was gracious enough to leave you some inheritance money.
Buts let’s go ahead and analyze some of the pitfalls of landing huge a windfall.
5 TYPICAL PROBLEMS PEOPLE WITH INHERITANCE MONEY FACE
Most potential heirs to wealth know they’d eventually come into wealth, even if they don’t know the amount.
In families where money or Wills are never discussed, the inheritance comes as a shock, especially for youngsters.
A lot of people under the age of 25 get an inheritance and don’t get the confidence to earn their own way even with such headstart. In the end, that’s incredibly not cool.
Earning a living is a thing of pride among responsible people, and a shared one among peers. For it gives a self-made feel and that’s priceless!
For those with enough inherited money to bypass that experience of being self-made, such inherited wealth may often result in a burden.
The beneficiaries are aware that they’re profoundly different at an age when they want to be like everyone else, and this is due to the “insane” amount of inherited cash or jewelry, as the case may be.
Do I deserve this money? This question is usually followed by feelings of unworthiness of coming into such inheritance.
Some go as far as giving all the money away to a charitable course or some trust fund because they feel they don’t deserve such wealth, believing they didn’t work for it.
Not everyone will want to give their inheritance away, but the key is to figure out a purpose for the money.
You can also make a list of all the ways you can life would be enhanced if money were no object. Then prioritize the list based on the amount of your inheritance and figure out how to use the money to reach those goals.
Go on the Internet to identify groups and organizations that will match your goals and ideals, whether they include wealth management, financial literacy or philanthropy. Trust me, you’d be amazed at your findings.
FALSE ILLUSIONS AND IDENTITY CRISIS
Many people who dream of inheriting a butt load of cash are convinced it will light up the path to the Easy Life.
But in fact, if you talk to beneficiaries and investment managers, they’ll tell you an inheritance often causes more trouble than it solves.
Money magnifies and enhances problems as well as good instincts, and even the Holy Books will tell you “money is the root of all evils”.
Receiving an inheritance unprepared for can mess with someone’s sense of identity.
Most times this can come as a result of people looking down on you, because you inherited a lot of money, and you begin to feel worthless and unmerited.
Does this inheritance mean I’m now uber rich? This is the first question on the lips of all inheritors.
Younger inheritors are especially wide-open to lack of understanding about how much money is a lot of money, versus how much money is enough to live a modest life.
Most inheritors don’t have a concept of how far the money can go, and this often leads to expensive purchases such as boats or condos in upscale neighborhoods that require ongoing maintenance and tax payments that can sink an inheritance like quicksand.
The solution is preparation. It’s really important to prepare children for the possibility of inheritance.
Even if it seems daunting to learn about money, financial education is a really good investment in yourself.
Before making decisions, find a basic financial literacy guide or advisor. You can also engage your self in financial literacy at a local community college, that’s is a good place to start.
CELEBRITY LIKE GRANDEUR
The media today is awash with images of how the rich and famous spend their money, flying private and driving million dollar cars.
If you start acquiring unwanted luxuries like these celebrities, you will not only accrue more expenses trying to maintain such “liabilities”, you’ll also cause relationships in your life to whither.
You always hear celebrities talk about envy towards them (haters), now others will have that envy for you, and that doesn’t do much for maintaining good relationships (something you’d definitely need in life).
It is always best to maintain a separation from the buzz around celebrities and focus strategically on your own goals and lifestyle.
BECOMING THE “CHEERFUL LENDER”
Once it becomes public knowledge that you recently landed a huge wad of cash, everyone will want to ask you for a loan, sometimes for an insanely large amount.
Inheritors suddenly become everyone’s target for money.
On the other hand, you may be in a position to genuinely help someone. It is usually wise to plan ahead for how you will respond when asked for money.
There’s no text-book answer, but you have to try as much as possible to be honest when someone approaches you for a loan.
Leave emotions out of it and remember to take care of yourself first.
To avoid making an unplanned loan, you can explain to whoever is asking that the money is earmarked for other expenses, specific charities, or that it’s locked up in trusts.
But if you do decide to lend money, make sure each party is clear on the terms and have them contracted in writing and witnessed by lawyers.
HOW TO INVEST INHERITED MONEY
PICKING AN INVESTMENT PRODUCT
First, think about where you would like to invest this windfall. At this point, it will be wise to pick something you are quite familiar with, a business which you already know how it works.
Always consider your appetite for risk as this will also shape your decision.
Also, consider how much time you’re prepared to spend on your investments. Are they going to be long term or short term.
Investments such as exchange-traded funds or index trackers offer you instant diversification and security and these are short term.
Build a portfolio that suits your risk appetite, spread your money across different asset classes, including equities, property, fixed interest (especially government and corporate bonds) and gold.
Each of these asset classes has its own characteristics that determine factors such as performance and the level of risk. It is advisable to get credible financial advisors to guide you through the process of selecting and investing.
While you can select assets that deliver a healthy stream of income as well as capital growth, fixed interest investments in landed property, are focused primarily on producing a regular and predictable income.
While financial analysts swear that all portfolios should have a mix of different asset classes, how you design and manage your portfolio will be dependent on your appetite for risk and income.
For example, if you are comfortable with taking the risk and have a reasonably long timeframe, or you have other reasonable sources of income, you could hold as much as 80% in equities.
Alternatively, if you were cautious like me, more of your portfolio should be in investment bonds and cash with your equity allocation potentially down to 20 per cent or less. This creates fluidity in your funds and makes your portfolio more flexible.
Where immediate income rather than a growing capital (which is ideal to boost income in the future) is important, you might look to increase your property holdings, thereby making money from rent on such property.
It is wise to remember that even within an asset class variation, there can be huge variations in risk.
Your decisions should also be affected by any existing investments you might have, prior to the windfall.
For example, if you already have a well-structured portfolio in place, you might want to stick with the existing asset allocation and top each element up, instead of “testing new grounds” simply because you have come into more cash (remember what we earlier said about investing in business you know very well?) .
On the other hand, if you get a kick out of taking risks, you might want to add a new form of investment to spice up your portfolio, but this should be done with the guidance of your bankers or a financial advisor.
It is never wise to invest without professional guidance.
Considering tax implications for your windfall is not only wise, it is absolutely important so as to avoid legal issues.
Making your money as tax-efficient as possible can help to boost the return you receive also.
An individual savings account will also help to shelter your money from tax since payouts can be taken at any time.
It’s also important to cast an eye forward to when you might want to access your investment as this can have tax implications too.
While it may seem a long way off, you may also want to consider future inheritance tax implications, especially as this could effectively wipe 40 per cent off the value of your investment. Ask your financial advisors for more clarification.
PENSIONS AND OTHER MATTERS
Pensions can also work well as a means of passing on money to the next generation.
If you are under 75, at your death, the person inheriting your pension pot will pay no tax on it (awesome right?).
However, if you’re over 75, they will pay income tax at their marginal rate on any income or lump sums.
Using all or some of your windfall to set up a trust could stop you increasing the value of your estate without losing control of the money, so you might wanna consider this.
As another option, where you’ve received an inheritance, you could consider a deed of variation to alter the deceased’s will, bypassing your own estate and going straight into someone else’s, such as a child or grandchild. (Pretty smart according to my research).
Uneducated inheritors should learn to take control of aspects of their financial situation as they get a better hang of it.
Competence is always key and often leads to confidence but it should be done at slow, steady and very calculated steps.
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