Expecting an inheritance? Follow these 6 tips

February 24, 2023

Allworth Co-CEO Scott Hanson shares a few helpful reminders about inheritances.

While you may think that receiving an inheritance is automatically a wonderful thing, that’s not always the case.

Without weighing in too heavily on the cautionary side of a sudden windfall (think lottery winners and professional athletes), here are some basics about how to respond to an inheritance so you are less likely to be left disappointed or broke.

1. Consider the possibility that you may never receive any of the money

Lawsuits. Secret wills. Back taxes. Debt. Probate. And, among the most shocking of all, instances where a benefactor has accidentally left an ex-spouse as the beneficiary on a 401(k).

I even know of someone who lost out on over $2 million in property because an uncle had not signed final divorce papers 58 years earlier.

There are loads of things that can come between you and your future windfall.

It is also human nature to make financial plans today based on what seems like a certainty tomorrow.

Fight against it.

First, contrary to popular sentiment, most inheritances are small (averaging about $50,000) and not life changing. Second, 80% of people who inherited money between 1980 and 2010 reported that they had received “significantly less” than they had been promised or that they themselves had assumed they would.¹

2. Wait before making any big decisions

Nationwide, the average duration of probate is one year. In some states, it is 18 months.²

And as for cost, depending on the size, location, and complexity of the estate, probate can eat up roughly three percent of its total value. (That could be $30,000 out of your pocket on a $1 million inheritance.)

All that aside, for those people who receive a sudden, substantial inheritance, the most important piece of advice I can give is to immediately… do nothing.

Everyone’s situation is unique, and I want to emphasize that I am not an estate planning attorney. But if it were me, and I inherited a sizable amount of money, I would take a couple of months, probably find a federally insured bank or credit union (depending on the size of the inheritance, you may have to open more than one account) and allow a few months to pass so I could clear my head.

Move slowly. Clear your head. Repeat.

That is because when you consider that two of the biggest stressors in life are the death of a loved one and money, suddenly braiding them together is surely going to produce some strange, unfamiliar emotions.

Not an optimum time for big decisions.

3. Depending on the amount, consider professional advice

If you have inherited a life-changing amount of money, a lump-sum that is more than you have ever had the experience of handling before in your life, after the smoke has cleared, I would conduct my due diligence and find a 100% fiduciary advisor.

While I’ve obviously had 30 years to form my opinions, if you make a good decision, I do not care if it is Allworth Financial, or another one of the competent, credentialed, fiduciary advisors you could choose from, just so long as you simply refuse to work with anyone who isn’t legally bound to have your best interests in mind 100% of the time.

That means no proprietary sales products. No prohibitively illiquid investments. And no schemes or pie-in-the-sky advisors who promise you they can beat the market, or that they know something that no one else does.

They do not.

I would then set about working with your fiduciary advisor to create a plan to invest that money in a manner that takes into consideration your debt, overall assets, tax bracket, Social Security income, investment time horizon, risk tolerances, your short- and long-term goals and dreams, and, finally, your complete financial situation.

I can almost guarantee you that, if they know their job, you will leave their office not only feeling much better about your future, but also with a host of financial considerations that you had never thought of before.

4. Assess your debt

If you inherit money, while high interest debt (such as credit cards) is likely going to be something you will want to address quickly, low interest debt, such as a mortgage, will need to be evaluated on a case-by-case basis to determine the best course of action.

However, while getting rid of high-interest debt is typically a no brainer, there are other considerations. How much did you inherit? If you pay off all your debt, will you still have an emergency fund?

Speak with a professional who can help you make the best possible decision for you.

5. Be selfish

I cannot say you should never loan newly inherited money out to friends or family, but I can say that you should almost certainly never loan newly inherited money out to friends or family.

Make no mistake, while there will be pressure, this will almost certainly be the only windfall you’ll ever receive, so you have to make it work for you.

So, as an amendment to the earlier rule that you should wait a few months to make any financial decisions? IF you are under intense pressure to loan a relative money, then I would tell them that before you can make your decision, that you must first meet with an advisor.

6. Don't forget about taxes

Not all inherited money is created equal. Diverse types of accounts are taxed in separate ways. And some, of course, are not taxed at all. Just because you receive a lump sum of money does not necessarily mean that you will not owe part of it to the IRS or the state.

I hate to be Scrooge, but unfortunately, we live in complicated, litigious times.

Protect yourself.

In an ideal world, you will someday inherit more money than you ever imagined you would. That money is set up in a trust and avoids probate. And the money you inherit improves, not only your financial life, but is managed in such a way as to improve the lives of your children and your children’s children, too.

Among the best ways I know to achieve that goal is to be patient, seek out fiduciary, professional financial advice to build a comprehensive plan, and, lastly, to think thrice and fight to avoid loaning out your new-found wealth.

¹^{What to Do With a Large Inheritance (investopedia.com)}

²^{How Long Does Probate Usually Take in California? (cpwalkerlaw.com)}

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^✢ Scott Hanson, Investment Advisor 2005, 25 most influential people in the financial services industry. The ranking reflects 25 people who Investment Advisor magazine believes have had or will have the greatest influence on the financial services industry.

^✼Pat McClain, InvestmentNews 2014, Invest in Others Community Service Award, presented to an advisor who has made an outstanding impact on a community through managerial contributions to a non-profit organization.

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