Whether you're a Maltese named Trouble who's been left $12 million by bossy hotelier Leona Helmsley or a boomer who's received a portfolio full of IBM (IBM) and Merck (MRK) stock from your parents, an inheritance holds the promise of changing your life.
If you don't blow it, that is.
And blowing it is a distinct possibility. Because as much as it sounds like a dream come true, inheriting money is also stressful -- psychologically, emotionally and even physically. (Trouble the Maltese may be an exception.)
Many inheritors deal poorly -- or not at all -- with all that stress, which can have disastrous consequences. Think ruined sibling relationships, nasty divorces and empty bank accounts.
Want to avoid that fate? Below are the top three traps you should be aware of when you become a beneficiary.
Trap One: Acting Too Fast
The reality is that you typically only receive an inheritance when someone close to you dies. As a result, grieving -- not investing -- needs to be at the top of your to-do list.
That's not just psychobabble; people who've lost someone important typically have trouble sleeping and are forgetful and inconsistent -- not qualities you frequently find in savvy investors. "You may have been really great at communication and compliant with the requests that people make of you, and all of a sudden you're looking like a whack job," says Susan Bradley, founder of the Sudden Money Institute in Palm Beach Gardens, Fla. "That's OK as long as everyone around you understands that this is normal -- and temporary."
So don't do anything impulsive, such as granting a request for a loan from a long-lost "friend," quitting your job -- or even plunking your money in an account you hold jointly with your spouse. In the long run, the joint account may be a fine place for the cash.
But in the short term, don't endanger your inheritance by making it marital property and perhaps later losing a chunk of it in a divorce. Instead, put the money somewhere safe and relatively liquid, such as a CD or money-market fund, and spend some time dealing with your grief.
Trap Two: Refusing to Change Anything
Once you're ready to ponder your investment strategy, remember that it's
strategy, not Great Aunt Betty Faye's -- even if she did bestow upon you a generous array of T-bills earning a whopping 3%. While Betty Faye and others who grew up during the Great Depression typically stick with extremely conservative investments, you probably should be more aggressive.
It may be hard to make the switch, but do it. "There can be a psychological hurdle in selling your benefactor's portfolio," says Leisa Aiken, a certified financial planner with Timothy Financial Counsel in Chicago. "You need to ask yourself if you would buy this investment now if you'd inherited cash instead."
Trap Three: Going It Alone
Do-it-yourself investing can be a beautiful thing. But when you come into a significant sum, it's worth using a small portion of the money to hire someone -- the right someone -- to advise you.
"People often get an unrealistic idea of how much cash flow an inheritance can provide," says Diahann W. Lassus, president of Lassus Wherley, a New Jersey wealth management firm. "For example, if you receive up to about $300,000, you can afford to use some of the money for a vacation or that car you've always wanted. But don't quit your job -- not unless you can live on the $15,000 annual income that money will provide."
For a reality check, hire a fee-only professional adviser who can run through various scenarios and help you decide on the best course of action. Meanwhile, perhaps you can borrow a few bucks from Trouble.