Dealing with the loss of a loved one is never easy. In addition to the emotional challenges of loss, many people are thrust into dealing with financial complexities. This can be especially challenging for younger beneficiaries. In fact, it is not uncommon for young adults and children to learn that they are the beneficiary of a portion of a family members estate without fully understanding the implications. From grandparents choosing to “skip a generation” and leave a portion of assets to their grandchildren to the unexpected loss of a parent, assets often end up being passed to younger, financially inexperienced and unprepared beneficiaries. The question becomes, how can young beneficiaries make wise choices for their inheritance that may have lasting financial impacts on their life for years to come?
Do not rush into any decisions
It is always a good idea to avoid making quick decisions when it comes to sudden wealth and this is especially true for younger beneficiaries. Special care should be taken to avoid making any major purchases or investments until the beneficiary has the opportunity to reflect, consult and plan.
Unfortunately, it is common to over assess the financial impact of an inheritance. For many young beneficiaries, even a small inheritance can seem like “all the money in the world,” leading to a belief that their newfound wealth can do more and last longer than it really may. From lottery winners to athletes, the statistics clearly show that sudden wealth can disappear as quickly as it comes. The fact is, even a substantial inheritance can be spent in the blink of an eye.
The perceived impact of an inheritance may also cause some young beneficiaries to alter their plans for their careers and education. Rather than deviate from plans for college or a career, it may be advisable to view the inheritance simply as money for the future. Developing a game plan that illustrates the financial impacts of an inheritance before making any major decisions may help to provide clarity and empower beneficiaries to make better choices.
Spending versus investing
It is human nature to want to spend newly found money and an inheritance is often no different. The imaginations of young beneficiaries can run wild with thoughts of material possessions like vehicles, clothing, electronics and apartments to rent. While there may be some necessary purchases, it is important to think of an inheritance in the context of investing versus spending. The two should not be confused and it may be helpful for beneficiaries to challenge themselves to view their funds as being primarily available for investing and saving – not spending. Paying for college, purchasing a home, building cash reserves, saving for retirement and even paying down high interest debt may all be better choices than making compulsive purchases. Delineating between spending and investing is an important skill for any beneficiary to learn as they contemplate how to earmark their inheritance.
Protecting beneficiaries from themselves
Even the best-intentioned family members can cause problems for their young beneficiaries when they pass away. Rather than leaving money with no strings attached, effective estate planning may help to protect young beneficiaries from themselves. According to Kenneth Lackey, a trust and estates attorney in Monmouth County, New Jersey, “Creating trust provisions that limit access to funds until specific ages are reached can be an effective of way of protecting beneficiaries from prematurely spending through their inheritance. For example, assets can be available, at all times, for the health, education, maintenance and support of the beneficiary at the discretion of a trustee and then the remaining assets can be distributed on a non-discretionary basis at different intervals such as age 25, 30 and 35.” In addition, provisions can be used to enable the trustee to delay access to the trust fund in the event of issues such as drugs, alcohol or gambling, notwithstanding that one of those stated ages may have been attained. In that event, the trustee can preserve the funds in the trust until the problematic issue is resolved, which can actually be an incentive to resolve such problems. Such language can assist the trustee in the event of litigation brought by the beneficiary.
When it comes to significant wealth, it can be even more critical to prepare young beneficiaries. Mr. Lackey adds,” If possible, it is a good idea to get beneficiaries exposed to the responsibilities and challenges that come from sudden wealth before the older generation passes away, to learn how to handle wealth responsibly.” Establishing family meetings that are moderated by your financial, accounting and legal team can be an effective way of working through financial issues before they occur while preparing the next generation for the future. Financial literacy is a critical component and the sooner beneficiaries learn about the nuances of responsible money management, the better.
While money is something that many people avoid discussing, working with a team of professionals can help to prepare families for the challenges that come from an inheritance and sudden wealth. Developing a comprehensive financial and estate plan with open communication, avoiding compulsive purchases and a focus on investing for the future are all strategies that can help young beneficiaries to make better financial choices with an inheritance. Since everyone’s situation is unique, consider speaking to your legal, tax and financial adviser to determine the most appropriate approach for you.
Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.