Don’t spread yourself thin when receiving an inheritance

YOUR INVESTMENTS: More than one-third of all inheritors see no change or a decline in their wealth after getting an inheritance.

 New Israeli Shekel banknotes are seen in this picture illustration taken November 9, 2021 (photo credit: REUTERS/NIR ELIAS)
New Israeli Shekel banknotes are seen in this picture illustration taken November 9, 2021
(photo credit: REUTERS/NIR ELIAS)

Beware how you trifle with your marvelous inheritance, this great land of ordered liberty, for if we stumble and fall, freedom and civilization everywhere will go down in ruin. Henry Cabot Lodge 

As reported here we celebrated my son’s bar mitzvah 2 weeks ago. Luckily we made it through without having had a “super spreader” event. Other than asking us for money to buy a Hapoel Jerusalem basketball t-shirt, which we responded “Um, why don’t you use some of the gift money that you received to buy the shirt?,” he has been very responsible with his newfound money. That makes us so proud. 

He realizes that he has received a certain amount of money and that he can’t go out and buy a Tesla, a phone and a $2.5 million apartment in Rechavia (these are all on his wish list!). He understands he can spend what he has, minus charity and that he also wants to save some for the future. 

Earlier this week I received a call from a man who received a substantial inheritance. He is already retired and his mother passed away at a rather advanced age as you can figure out. He received $600,000. He never had much savings or pension and is living on a small amount of US Social Security and an even smaller amount of Bituah Leumi. After asking some more questions it became clear that he needs about $30,000 a year in supplementary income. I mentioned that that’s amount is doable and that he can have a portfolio where he will be able to take that out and over time he should be able even to slowly grow the portfolio.

Then he threw a wrench into the plan. “I forgot to tell you that I inherited $600,000, but I gave a gift to one child, helped another with a down payment and loaned money to my nephew to help him start his business. I actually have about $400,000 left!”

A bank employee counts Israeli Shekel notes for the camera at a bank branch in Tel Aviv (credit: REUTERS)A bank employee counts Israeli Shekel notes for the camera at a bank branch in Tel Aviv (credit: REUTERS)

Yikes. That certainly changes things. He literally spread himself too thin and could have potential money problems down the road, especially if he needs to start eating principle from the get-go.

I receive calls all the time from heirs. They have come into money and need help planning and managing it. I can tell you that the above story, while maybe a bit extreme, is quite typical. The difference tends to be that the inheritor is thinking about all the things they want to do with the money and the call I mentioned actually went ahead and fulfilled his dreams.

Personal finance guru Dave Ramsey writes, “Receiving an inheritance from a family member should be a blessing. But too often, it becomes a curse. It’s estimated that $68 trillion worth of assets will pass down from Baby Boomers to younger generations over the next 25 years, and many of those heirs won’t know how to put their inheritance to good use. 

More than one-third of all inheritors see no change or a decline in their wealth after getting an inheritance. Did you catch that? 

Some folks see their wealth decrease after they inherit a financial windfall. We’ve seen too many people get an inheritance and then throw it all away. They go on a few vacations, buy a fancy new car, and before they know it, the money is gone and they have nothing to show for it.”

When you receive an inheritance it’s important to take your time before making any decisions. You are in the midst of grieving and you are overly emotional and not able to make rational decisions. I recommend waiting a couple of months before making decisions. Then in honor of the deceased, I think it’s a great idea to give some of the money to charity. What better way to honor their name than to help out and give back to society. If you have debt, outside of a mortgage, then pay it off. 

You can certainly use some of this money to improve your financial future. Paying down some or all of your mortgage and investing for the long term are two things that you can do today, that will be hugely beneficial down the road.  

And finally, there is nothing wrong with enjoying some of the money. Obviously, it depends on your specific financial situation, and how much you have received, but in most cases using some money for a vacation, or the much-needed kitchen renovation is reasonable.

Be smart and deliberate after receiving an inheritance to make sure that you take care of your own financial future before you start lending money to “needy” relatives.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

Aaron Katsman is author of the book "Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing" (McGraw-Hill), and is a licensed financial professional in both the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email [email protected]