“The call” comes in…and news is broken that your long-loved relative has passed away. Over the next several weeks, you and your family go through the 5-stages of grief: denial, anger, bargaining or guilt, depression, and acceptance. At the end of the family gatherings, internment, celebrations of life, and even some alone time, you discover that you have been named as primary beneficiary to the personal belongings and wealth of your deceased family member. Beyond the feelings of ‘what to do now,’ you suddenly have a wealth issue that needs to be addressed.

Over my advisory career, I have witnessed this scenario play out several times. Initially, mental accounting overpowers the rational thought process. People act quickly to address their own shortcomings, financial issues, and immediate wants and needs without regard to what might ultimately be in their future financial best interest. Acting quickly at a time like this is not recommended and may result in unintended tax or financial ramifications.

Prepared for Change?

Being fortunate enough to benefit from a sudden wealth or inheritance situation, one should immediately reach out to an experienced financial planner who can help you focus on the big picture and plan for your future. There are various issues that will undoubtedly be encountered as you enter these uncharted waters. Are you prepared to pay taxes on investment income, manage a trust, its distributions, and the filing of its taxes? How about paying off debts? Which ones do you pay off and which ones do you keep? Are you charitably inclined to give? If so, do you want to gift now or at the end of your life…or both? Could money change your reliance on another person or family member? Could, or would your sudden wealth affect your relationship with friends and family envious of your new financial situation?

A recent study and subsequent article from Forbes stated the following:

“The Silent Generation—the parents of the Boomer—and Boomers will pass down $84.4 trillion in assets through 2045, with $72.6 trillion going directly to heirs, according to an analysis by financial market intelligence firm Cerulli and Associates. The transfer of wealth will create a wave of changes for Millennials in their ability to purchase homes, pay off student debt, travel, buy high-end products and invest in the stock market.”

The risk with inherited wealth versus earned wealth is that wealth inherited by someone suddenly is typically treated much differently than wealth amassed slowly over time. In my experience, people who inherit money don’t want to risk losing it. And that’s completely in line with human nature – who would want to risk losing this one-time windfall? But this is in direct contrast with a person who earned their wealth slowly over time and took calculated risk to leverage it into a greater value for a plan or purpose.

It may be difficult to understand why such a contrast exists between earned wealth and inherited wealth. But I tend to believe those who have built their wealth from earnings have had to master the basic tenets and disciplines that went along with managing and growing that wealth. An injection of sudden wealth into a family that has never had the luxury of extra money creates a new and confusing situation that affords the opportunity of immediate gratification, which is the opposite of planning. It is in this situation that utilizing the expertise of a competent financial planner will benefit the most.

Rational Behavior gets Rewarded

I highlight these sensitive issues because they are real and there are preferable ways to manage them. As you encounter friends, family, and co-workers who suddenly have an inherited wealth situation, remember that they may be acting upon instinct to do what ‘feels’ right or what they ‘think’ is right. Feelings and quick actions should not be part of a planning process. Obtaining a full assessment of the financial situation and making rational decisions will help to ensure that money is managed for the goals and outcomes the beneficiary expects. If managed well enough, it  might even produce a legacy to pass on to the next generation!