Common mistakes when receiving an inheritance

Whenever one receives a sudden windfall, it’s important to stay level-headed and plan accordingly.

By AARON KATSMAN
October 31, 2012 23:34
3 minute read.
Money

Money 370. (photo credit: Thinkstock)

With much sadness I have seen more than a few clients pass away over the last few months. As such, I have spent a lot of time with children who have recently received an inheritance. Whenever one receives a sudden windfall, it’s important to stay level-headed and plan accordingly. I often see investors make the same mistakes over and over again.

Sentimental

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Without question, the most common of mistakes people make when they receive an inheritance, especially a stock and bond portfolio, is that they become emotionally attached to what they receive. They refuse to sell anything in the portfolio, even if they are good reasons to do so, because they say, “This is how I received it, and this is how it should stay.”

There are reasons the deceased was holding certain positions, most probably for tax planning considerations, and these reasons don’t apply to you, so it can be detrimental to continue without doing anything.

Last week, I met with a young lady who inherited a portfolio worth $400,000 that was solely invested in tax-free municipal bonds. She kept saying her father was a very successful investor, and if that was the portfolio he had, then it was good enough for her. I explained that her very successful and wealthy father was using these bonds for tax-planning purposes.

In addition, I tried pointing out that a 33-year-old mother of three, whose husband makes a nice living, doesn’t need municipal bonds, and she could use a more-diversified portfolio that has some exposure to growth as well. She wouldn’t hear of it.

I routinely see clients coming in with stocks that have been held by the deceased for decades, and the future prospects of the company are dim. When evaluating if an investment is worth holding, or if there is a better alternative, look forward.

Which stock has the better potential? If the stock you’re holding has a lousy outlook, why hold it? Take a step back and judge each position on its own merits to determine whether it should be kept or sold, not because it’s “been in the family” for decades.

Reallocate

Along the same lines of what has already been mentioned, due to sentimental reasons, people refuse to make any changes to the portfolio they have inherited. The problem with this is that your needs and goals are far different than those of the deceased. If you are younger and you need more growth-oriented investments, and the inherited portfolio is full of income-producing instruments, then changes should be made to make the inherited portfolio compatible with what you need. Conversely, the portfolio may be very aggressive, and you may have a much more conservative nature and find yourself starting to toss and turn at night worrying whether you lost money that day.

Take a break


We all dream about what we would do if we came in to a sudden windfall of money. We would give charity, buy a new apartment, a new car, furniture, whatever it may be.

With all our daydreaming we are still unprepared. Numerous studies have been conducted on lottery winners: how not only does their financial situation deteriorate but how they manage to self-destruct. One study noted how the average lottery winner blows through the winnings in five years.

Money isn’t the answer to all your problems; in many cases it can exacerbate problems you already have. It’s important, when coming into a large amount of money, to take a step back and catch your breath. Make a financial plan. Figure out what it is that you want to do both long and short term with the money.

It may be a good idea to sit with a financial adviser.

Financial advisers will: 1) help you look at things objectively; and 2) remain level-headed as this is what he does for a living, and chances are he will routinely deal with similar situations and have professional training on how to deal with these issues. He will be able to tell you if your goals are realistic based on the amount of money that you received.

I often recommend to those who suddenly come into to a large amount of money to wait a month or two before making any decisions. I find that this helps the client settle down and become a little more focused and much less impulsive about what to do with the money, and it ultimately allows the client to accomplish the goals that the money was intended for.

Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts. [email protected]


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