Your Investments: How to receive an inheritance

A son can bear with equanimity the loss of his father, but the loss of his inheritance may drive him to despair. – Niccolo Machiavelli

By AARON KATSMA
June 22, 2013 22:29
4 minute read.
Money

Money. (photo credit: Wikicommons)

 
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Should you plan for receiving an inheritance? In many circles, just speaking in broad terms about the topic is tantamount to handing a written invitation for the “evil eye” to come and wreak havoc. While I know many financial professionals who preach that children should have in-depth conversations with parents about “what to expect,” so that the kids can plan for the long term, personally I think that’s a bit gruesome.

My approach is to ask a bit about what kind of assets the parents have, and then leave it at that. That way you can have an idea of what you may receive, but you aren’t obsessing over every last dollar, which in my view creates a perception that you would rather not have the parent make it to 120. Let’s leave the living to live healthy, happy lives and let them enjoy their money. The question is what happens when parents do pass away, and you suddenly come into a windfall of an inheritance? Here are three tips that will help you handle your new-found bonanza: Settle down Probably the best advice I can give anyone upon the receipt of a windfall is to take some time and clear out your head. Stick the money in a short-term deposit for a month or two to help calm down and allow for more rational thinking. Just because you come into money doesn’t mean you must allocate every least penny immediately.

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Take your time.

I encourage spouses to make individual lists and then sit and compare them. This is a great way to achieve common goals, and it certainly helps with matrimonial harmony, as each side has a say in what to do with the new-found wealth.

Get out of debt If you have credit-card debt, a bank overdraft, or owe an individual or the government money, pay it off and get yourself back on track. Now is the time to correct the years of bad financial habits that have accumulated, and you have an opportunity for a fresh start.

The question I frequently hear in these circumstances is regarding the mortgage. Should it be paid off or not? While many will tell you to keep the mortgage, because terms have been favorable for the last few years, and the money you borrowed is “cheap,” I am not a huge fan of debt of any kind, and if you can pay it off, go for it. You can then go ahead and take the amount of money you were paying monthly and move that into an investment account every month.

It’s now yours I can’t even begin to count the amount of times I have met with someone who inherited a portfolio and out of a sense of sentimentality proceeded to keep the same investments for years and years.



When a new client who had received an inheritance eight years ago opened up an account with me, we sat down to review his current holdings and discus the portfolio.

Some of the client’s stocks were showing large losses. It turns out that the parent had decided to move a big chunk of his portfolio into bank stocks in 2003. The child received the inheritance after the father’s passing in 2005 but felt he shouldn’t make any changes to the portfolio.

Fast forward to 2013 and many of those bank stocks are trading at a fraction of what they were eight years ago. I asked him why he never made any changes to the portfolio, and he explained that since he had received them as an inheritance, he felt awkward about selling them. He felt a certain attachment to them and didn’t think they should be sold.

Another common scenario is when you receive an inherited portfolio where the investments are geared for someone who is living off of fixed income, or is wealthy enough that certain investments are made for tax-efficiency reasons.

I sat with someone in his late 20s who received a substantial amount of money from his grandmother who had recently passed away. She was in her mid-90s and her portfolio was invested solely in tax-free municipal-bond mutual funds. Now that happened to be a smart investment approach for her, but her 20-something grandson, who is in university getting an advanced degree, has no real need for tax-free income because he has no income to speak of and therefore doesn’t pay any taxes. He has his whole life ahead of him, and the portfolio should match his goals and needs, not his grandmother’s, now that it’s his money.

There is a good chance that the relative who left the money for you as an inheritance would like you to gain from it. Speak with your financial adviser to ensure that your new-found money is allocated in a way that will put you on the path to financial independence.

aaron@lighthousecapital.co.il

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

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