3 TIPS UPON RECEIPT OF AN INHERITANCE

A few weeks ago I received a call from a 24 year old, who unfortunately lost his father to cancer. He was set to receive about $200,000 and said he had no clue how to handle money let alone such a sizeable sum. He said he felt overwhelmed and found it necessary to speak with a professional. Whether you decide to handle the money yourself or with an advisor, here are some tips for those who receive an inheritance.

Plan

What would you do if you came into a sudden windfall? Let’s face it, we all think about it. We would give charity, pay off debt, buy a new apartment, a new car, travel etc..whatever it may be. With all our daydreaming we are still unprepared. Numerous studies have been conducted on lottery winners, and how not only does their financial situation deteriorate but how they manage to self-destruct. One study noted how the average lottery winner blows through the winnings in 5 years. Money isn’t the answer to all your problems; in many cases it can exacerbate problems you already have. It’s important, when coming into a large amount of money, to take a step back and catch your breath. Make a financial plan. Figure out what it is that you want to do both long and short term with the money. It may be a good idea to sit with a financial advisor. Financial advisors will 1- help you look at things objectively and 2- will remain level headed as this is what he does for a living, and chances are he will routinely deal with similar situations and have professional training on how to deal with these issues. He will be able to tell you if your goals are realistic based on the amount of money that you received.

Loyalty

Without question the most common of mistakes people make when they receive an inheritance, especially a stock and bond portfolio, is that they become emotionally attached to what they receive. They refuse to sell anything in the portfolio, even if they are good reasons to do so, because they say,” this is how I received it and this is how it should stay.” There are reasons the deceased was holding certain positions, most probably for tax planning considerations, and these reasons don’t apply to you, so it can be detrimental to continue without doing anything.

I routinely see clients coming in with stocks that have been held by the deceased for decades, and the future prospects of the company are dim. When evaluating if an investment is worth holding, or if there is a better alternative, look forward. Which stock has the better potential? If the stock you’re holding has a lousy outlook, why hold it?  Take a step back and judge each position on its’ own merits whether it should be kept or sold, not because it’s” been in the family” for decades.

Personalize

Along the same lines of what has already been mentioned, due to sentimental reasons, people refuse to make any changes to the portfolio they have inherited. The problem with this is that your needs and goals are far different than those of the deceased. Make sure that your newfound money is invested in a manner that’s personalized for your specific situation.  If you are younger and you need more growth oriented investments, and the inherited portfolio is full of income producing instruments, then changes should be made to make the inherited portfolio, compatible with what you need.  Conversely the portfolio may be very aggressive, and you may have a much more conservative nature, and find yourself starting to toss and turn at night worrying whether you lost money that day.

I often recommend to those who suddenly come into to a large amount of money, to wait a month or two before making any decisions. I find that this helps the client settle down and become a little more focused and much less impulsive about what to do with the money, and ultimately allows the client to accomplish the goals that the money was intended for.

 

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA. For more information, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il