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Inheritance – Curse or Blessing?

You just inherited some money. What do you do with this windfall?

By Mark Bordelove

I recently had a client inherit roughly $750,000 from an uncle that he was very close with. The uncle had no children and left the money to my client and his brother. My client is in his early 50s and has been successful in technical sales over his career. His wife works and makes a stable income. They have saved diligently in their retirement accounts and have sent two of their three children off to college.

The first thing he said to me when he called was, “I am considering quitting my job and opening a weed business.” My first piece of advice to him was to hit the pause button and take a moment to reflect upon and appreciate his great fortune, and not make any snap decisions.

It is very rare people have success in one career then launch into a second career and have equal or more success. I explained the math to replace his $100,000 per year salary: He would need to have roughly $3.4 million in non-retirement savings at 3 percent interest.

While he’s got a sizable non-retirement account, and this windfall jumpstarted his savings at least four years, he’s not at that $3.4 million level yet. And, leaving his current job would leave a large hole in their monthly cash flow. In addition, if he quit his job, he would not be paying into Social Security for potentially the next 10 – 12 years. That’s a huge basket of “nest egg” that stops being accumulated.

He slept on things for a few days then called and told me his wife nixed the second career venture. She convinced him it’s not worth gambling with four years of savings.

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It’s interesting to note that one-third of all Americans have said that if they were to receive a windfall, they would blow through it in two years. Everybody hears about the curse of the lottery and the stats bear this out: It’s likely that within two to five years of winning the lottery you will be filing bankruptcy. The tragic stories of athletes who had nobody assisting them and blowing through their contracts are too many to count.

Creating a Windfall Plan

Step one when dealing with a windfall is to have a plan. If holding onto money is not a strength, then bad habits will probably just match the size of the windfall. In essence, bigger dollars mean more problems. My clients had some parts of a plan already in place.

They have an existing trust to handle issues if one or both were to pass away, which avoids the survivor having to deal with probate. I advised them to revisit the trust because it’s been at least 15 years since it was prepared, and things have changed. There might not be anything to be done but it certainly is a box to check.

We need to consult with their CPA because, while this windfall might not throw them into a higher tax bracket, there are likely tax implications with the various investments they will be making.

They need to consider their goals for these funds. Most people would likely have some credit card debt to pay off. The difference between paying 15% percent on a credit card versus potentially generating a positive return on their investments is a huge opportunity cost if they don’t pay off credit card debt. In our case with them there is no credit card or high interest debt, so this is not an issue.

Catching up on some college savings for the youngest is a good idea so they likely will put $15,000 into the 529 Plan for this year and next, and likely have enough funds to get her through most of a graduate program if she chooses to do so. Since 529 funds are transferrable, if there are leftover funds, they plan to utilize the funds for grandchildren. They both max out their contributions to their 401(k) plans.

They have old individual IRAs that they have not funded in several years, so they might make the $6,000 contribution along with the $1,000 catch up.

If they did not already have life insurance, and were 20 years younger, I would suggest we look closely at getting some. It’s a great way to increase net worth. Something permanent and stable along with cash value would make sense, but given their age and the fact that their kids are adults it doesn’t make sense to add to what they currently have.

They are philanthropic and have an interest in several charities. I think we will look closely at working with their attorney to create a family foundation and start some form of annual giving. It’s a good way to give back and, of course, it’s tax beneficial.

I told him to be on guard for the lost friends and family that will start calling soon. These are the folks who, having heard about your good fortune, are looking for charitable donations, business opportunities, or just handouts. I told him to tell anyone who calls that his team of professionals are handling all issues and refer to us.

This is also an opportunity to enjoy a bit. This is a financially successful family that has planned and saved for their future. Do something special with family. Go on a special vacation that there has not been time or money for previously. I recommend Hawaii but that’s just me. The deceased uncle would be happy to know that the family got to enjoy some of the inheritance in the here and now.

The family is extremely grateful for the good fortune. After some initial funky thoughts, they settled down and realized this will speed up their plans for the future and intend to make good use of the funds.

About the author: Mark Bordelove

Mark Bordelove became a licensed financial advisor in 2000 and co-founded Bordelove Foster Wealth Management in 2009. A devoted husband and father, Mark has also completed two Ironman competitions

Mark Bordelove is a Financial Advisor with, and securities and advisory services offered through LPL Financial, a registered investment adviser, member FINRA/SIPC. This is a hypothetical situation based on real-life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Consult an adviser prior to investing. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

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