“Sudden Money” happens to a small percentage of people every year, including winners of lotteries, investors in companies that become stock market sweethearts, entrepreneurs, inventors, and a few others. Some instantly wealthy people are completely unable to manage their “Sudden Wealth Syndrome,” which has led to books such as Lottery’s Unlucky Winners: The Disaster After the Celebration. This is a collection of true stories about Sudden Wealth recipients who quickly became destitute.
Both in our day jobs and on the radio, we refer to inheritance as the ultimate “good news, bad news” scenario. Receiving an inheritance means that a family member has been lost (the emotional loss, or bad news), but the beneficiaries have experienced a financial gain (the good news). How the inheritance is treated is a sign of respect for the deceased who cared about the recipient.
Inheriting money is sometimes sudden or unexpected, but in other cases it has been planned for a long time. Wealthier families use sound estate planning to avoid “Sudden Wealth Syndrome” when their heirs receive their portion of the estate. Naturally, reactions to inherited money are as varied as the inheritors are numerous. Americans are on the leading edge of a massive inheritance, as aging Baby Boomers and their remaining parents will be leaving behind about $7 Trillion in accumulated wealth.
Let’s put that in perspective; that is 7 million millions of American Dollars! A lot of inheriting, and most of it with no Inheritance Tax (a/k/a Death Tax). That amount of money can be a powerful force for good. But, it will also attract the attention of crooks, shysters, jealous relatives and friends, and a host of salespeople, all of whom will try to separate inheritors from their Sudden Money.
In my 10 Personal Financial Rules we recently discussed, one was rule # 4: It is NEVER OK to plan ON an inheritance; it is ALWAYS OK to plan FOR an inheritance. What does that mean? If you are planning FOR your own financial future based on an expected inheritance, you may be in for a terrible letdown. Similarly, some people consider buying lottery tickets or other speculative ventures their personal ticket to financial independence. They, too, will most likely be disappointed.
Planning FOR an inheritance simply means that you know what you will do with the money once it is received. This is true financial planning, and will help insulate you from the vultures I just mentioned (and, sometimes, from yourself). If you are fortunate enough to know that you will receive an inheritance, it is time to start your personal financial planning, before the money is received. We suggest that you seek out a fee-only, Registered Investment Advisor, with planners who have earned the Certified Financial Planner™ Professional designation.
Van Wie Financial has assisted many people with their transition to Sudden Wealth, and we understand that the actual size of the inheritance is not the most important factor. If you have a set goal of becoming financially independent, virtually any amount of inherited money simply hastens your arrival to that goal. If you haven’t thought about your own future financial independence, honor the deceased who left you an estate by acting as he or she apparently did while accumulating the estate’s assets.
One of the main mistakes made by inheritors of IRAs is to lose the “stretch” provision that would allow them to use the Inherited IRA as their own personal retirement account. This is easy to miss, whether you are going it alone or using an unqualified advisor. Consequences of blowing the chance to “stretch” your Inherited IRA are expensive, in that taxes will be due on all of it, either immediately if you took the cash, or over 5 years if you fail to Inherit the account according to the rules. You should also know that even when the rules for Inherited IRA are followed, they may not be optimized to reflect the best long-term benefit to multiple beneficiaries.
Another common problem is not assuring that the deceased (assuming he or she is subject to RMDs) takes an RMD in the year of death. This will lead to penalties and taxes that are unnecessary.
For IRA owners who are still able to fog a mirror, you should be responsible enough to be certain that your beneficiary designations are accurate and up-to-date. Changes in families, relationships that sour, or changes of heart, can all result in Beneficiary Designations that no longer reflect the owner’s wishes. When something changes, or if you do have a change of plans, review, revise and correct your Beneficiary Designations.
When an inheritance is non-qualified, there will most likely be no taxes on the receipt of the money. This is commonly misunderstood, and can lead to false euphoria and excessive spending. But that isn’t to say that we believe that all inherited money should be hoarded.
Many people are surprised when we tell them to take a little “off the top” of an inheritance to do something you have been wanting to do. Depending on the inheritance size and the beneficiaries’ desires, it may be a trip, a new car, a paid-off mortgage, or whatever. An easy rule of thumb is to immediately enjoy 10% for yourself, and to keep 90% for your future. This helps satisfy the “I have new cash money itch,” but keeps the principal largely intact. The super-wealthy have a simple rule for their fortunes – don’t touch the principle. Live off the earnings, and you will never run out of wealth.
A good advisor can illustrate for you the long-term effects of good planning and investing. If you are ever faced with this prospect, it costs you nothing to call the show, or to make an appointment to discuss your situation in our office.
Van Wie Financial is fee-only. For a reason.