Dealing With the Perils and Pitfalls of Sudden Wealthflow

“As Baby Boomers begin to realise their inheritances, we’re about to see the greatest transfer of wealth in European history.”

John stared at the cheque for a long time. It was made out to him and it was for more money than he had ever hoped to see at one time. Still, his first reaction was to send it back to the insurance company; he didn’t want it. His second reaction was to buy Mary a big diamond ring for their twenty-fifth anniversary. Instead, he put the cheque in his sock drawer and didn’t say a word about the money to anyone for a month.

What would you do if a cheque showed up one day for £1M? You might want to give that question some serious thought. You could be among that group. No, it’s not the lottery or the ability to pick shares on the stock market. It’s your inheritance, a gift from your parents or grandparents.

Today’s super seniors, age 75 plus, are the richest generation in history. Not bad for a group that survived the Great Depression, won World War II and went on to rebuild Europe…and they’re planning to pass much of it on to the next generations.

The problem
Many people are unprepared to receive this money. Part of it has to do with contemporary attitudes towards money. Most of us today, unlike the generation that grew up in the 1930s and 40s, are more inclined to spend than save.  Unlike their frugal parents boomers have exhibited the lowest savings rate in recent history. They’ve also amassed the highest debt in history.

Plus, it’s difficult to remain objective over one’s inheritance. Since the money is directly related to the death of a loved one, there’s often a conflicting mixture of guilt and elation. “On one hand, I experienced a euphoric rush,” said one man. “Suddenly, I could pay off bills, put a little aside, get off the financial treadmill. On the other, my mother had to die for me to receive the money.”

The consequences can be disastrous, whether the amount is a few thousand pounds or several million. When it comes to “windfall” money, points out entrepreneur Robert T. Kiyosaki, author of Rich Dad Poor Dad, many people “don’t know what to do with it.” He stresses that the money is often mismanaged or spent without planning. As a result, it’s not uncommon for an entire inheritance to vanish within a year or two.

What should you do if you are in line for an inheritance? Here are some suggestions, starting with steps you can take while your parents are still alive:

• Set up a dialogue with family members. If you are in line for an inheritance from your parents, see if they are receptive to discussing their plans and any concerns you may have. This helps take the surprise factor out of the inheritance. Besides, it is much easier to address important issues when all parties are available.
• Discuss financial tools to help distribute assets, reduce taxes, and preserve capital. These may include making lifetime gifts, establishing a power of attorney and using trusts.
• Respect their wishes. Remember, it’s their money. One 89-year-old man instructed his son to manage his inheritance as he saw fit and to use gifting to reduce the estate. “Other than that,” recalls the son, “the only strict rule was that Dad wanted to keep £500,000 in his own name during his lifetime.”
• Express your own concerns. When John’s father died, his mother began to date again and even talked about marriage. John was concerned about his own inheritance passing to his mother’s new husband. After several conversations, thought she never did marry, the mother set up trusts to protect her family’s inheritance.
• Educate yourself about the estate planning process. The more you know going in, the better able you will be to preserve your inherited wealth.
• Plan ahead. Know how you will utilise and allocate your inheritance. That way, when the money arrives, you will be ready.
• Have reliable advisers in place. Bring your Solicitor and Financial Planner in to discuss your options and help work out plans.

The key is awareness and preparation. If you understand the perils, pitfalls and opportunities you face regarding your inheritance, you will be better prepared to utilise those assets wisely.