Ep #9: Managing An Unexpected Inheritance
In this episode, we will discuss how we can help by:
- Identifying best use for the newfound wealth
- Review our checklist based on your phase of life
- Not letting emotions get in the way of making irrevocable decisions
- Providing comprehensive financial planning
You can also watch the full video on YouTube:
Benjamin Haas 0:06
Hi everyone, and welcome to A/B conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning, and what should really matter most to you. A healthier financial life starts now
Adam Werner 0:29
And you Ben. Another round. Here we go again.
So today we're going to talk about managing an inheritance and the role that we hopefully can help play there.
Benjamin Haas 0:47
When we were kind of getting ourselves oriented to talking about the sensitive subject, I think before we jump into how we can help, we always like to kind of frame this up. You and I were kind of talking about there being really two sides to this that, like many things in life seem to be competing with each other, right? First, if we're inheriting money, or somebody's inheriting money because somebody has passed away or a loved one has passed away. Money's already an emotional thing, but money tied to a person or a loved one is certainly going to potentially make that even more emotional. So whether that was expected or not, there's often the sense of a guilt, a pressure, right? There's now responsibility tied to, wanting to be a good steward of this; what would mom have wanted? What would Aunt Dottie have wanted? There's certainly going to be that side of it, but then there's the other side of it. That is human nature and whether you're incredibly responsible with your finances or not. When something has been put before you, the impulse may be with any windfall that it's going to accelerate something that that you wanted to do already, right? Is that buying a toy or is it fixing up the bathroom? Is there a way for me to now get something or do something that I've been looking forward to do? And now this is the means to the end. So I don't know, if you have anything that you want to add to that I just, I see those as two very competing things that we recognize when somebody comes to us in this situation?
Adam Werner 2:24
Yeah, I'll double down on that, we certainly see that the two extremes and a lot of people fall in the middle. But the extreme is what I want to be extremely prudent and extremely careful about. When I choose to do what I want to, respect the person's wishes, who this money came from, and make sure that they don’t squander it. The other side being well, this is now a new newfound pile of, whatever it is, whatever the asset is, whatever the investment is, and now I can use it to accelerate either my goals or just to your point, things that I've wanted, and haven't been able to do now I can have that instant gratification and just check that box off. So, we certainly see both sides of that.
Benjamin Haas 3:07
Yeah. And I think we've seen the studies, and studies show that there actually are more people in that latter camp, right, 7 out of 10 people who receive some sort of unexpected windfall exhaust that in just a few years. So let's maybe just let that be the framework and let's move into how we can help. Because I think first and foremost, we often say whether, again, it's a windfall based on heritance, like we're talking about today, or maybe it's some other means of falling into money, financial planning is the name of the game. That's why we're doing this podcast, let's talk first about why financial planning is so important. It's kind of the launching off point for this situation and let's highlight some scenarios based on their phase of life.
Adam Werner 3:55
I hope nobody's shocked to hear us talk about financial planning on our podcast. But clearly, that's where our mind goes first and it really does depend on and the way that we approach planning in general depends on phase of life. If it's a younger couple that has children, there may be a specific set of goals that's going to be very different from a someone nearing or in retirement. It really, for us that those specific questions or those specific fundamentals that we would want to see in place really does depend on where they're at in life.
Benjamin Haas 4:30
Yeah, so maybe if they received an inheritance, it's first, going back to our fundamentals, do you have a cash reserve? If you don't, maybe this should serve that purpose. Do you need to cut down debt? Or do you need to get yourself in a better spot with student loans, a mortgage, or helping with kids’ college? So I think that's spot on and when we say financial planning, it's who are you really relying on to have these conversations because with this newfound wealth comes that responsibility. I think to me, make sure you're making the best use of this money as you can. If you're just getting started out in life, those are the fundamental things that we would talk about. But what about the situation where somebody inherited its inheritance from older parents, so maybe they're not just getting started out in their financial life, but they're 50 -55 years old. You know, what does that conversation look like?
Adam Werner 5:25
So I think that clearly is that the sweet spot of that pre-retired profile for us. Someone who's nearing retirement maybe and is starting to think about retirement as an actual light at the end of the tunnel, they're getting close. We certainly see in that age range, they may have kids in, near, or just out of college. So they're dealing with some of those expenses. It's that competing goals idea, but the point is, this newfound money may not necessarily solve all of their financial woes. But our job and the way that we would approach that is, let's prioritize. It's planning to prioritize what your goals are, what are you looking to accomplish, and let's efficiently allocate whatever those resources are to make sure that actually aligns with what you say is important to you.
Benjamin Haas 6:23
Yeah, and I think we can leave that last camp, maybe the loss of a spouse or somebody that was intimately, whether you are close with financially and emotionally. I think that can probably be a separate podcast of how we have to help someone walk through that. But, let's maybe move to the second point, then of not only should you be relying on a financial planner, if you kind of have this major life transition of receiving an inheritance, but let's go to the second thing that I'd want to kind of harp on. That's acknowledging the things that we would want to try to prevent, or giving them some education on things that we've seen go wrong when somebody inherits something. I mean, I got a little list here. Do you want to? I'll maybe kick it to you first.
Adam Werner 7:10
Start with yours, and I'll fill in.
Benjamin Haas 7:13
Yeah, so I think we want to articulate it as not all inheritance is created equal, depending on what the assets are, right? There's a big difference to us between, I now was a part of a life insurance policy that comes to me tax free. Right now we're getting into nerdy financial planning talk, versus a retirement account that I have to pay taxes on. So this is why financial planning is so important. But we sometimes see the mistake of not really understanding what you own and then when you start taking money out to utilize it for your goals, once you have that plan. You didn't really factor in that these retirement assets on top of my income, are really throwing me into a higher tax bracket. And all of a sudden, I'm paying way more than I would have thought in taxes or early withdrawal fees or something of that nature.
Adam Werner 8:00
Yeah, and even as you were going through that, that's going to be a more prevalent issue. Right, inheriting retirement dollars, you go back to the 50’s, 60’s, 70’s, saving for retirement really wasn't necessarily a thing in these “retirement accounts.” You had your pension through work, you had Social Security, and you had just savings at the bank. You know, when the retirement accounts really started to come into play was the 80’s and 90’s. So now, what's being passed on? It's yes, changing. I mean, like anything else in this country, that's the way that we do business and just these options have evolved over time. People are now inheriting where the bulk of people are saving now, where we see the most amount of wealth is usually in retirement accounts. That creates a whole other ball of wax when it comes to excuse me, to your point, what you inherit and just how that's going to impact from a tax standpoint, it's not just the life insurance proceeds that are tax free, you can use them as you ration. There's no impact from a tax standpoint. But when you start getting into retirement dollars and Roth IRA versus IRA, to your point that the more you withdraw from an IRA, the more tax you're going to pay. So, depending on where those dollars get allocated there, there are ways to address that and try to limit the tax impact over time.
Benjamin Haas 9:30
Right? So if we think about it once again, there's different phases of life so somebody that's a little younger needed to have that money to pay off debt, but if you need to take a lump sum out of that retirement account, again, $10 coming out does not mean a net $10 to us. I think there's also this role that we would need to play regardless of what they were looking to do or how they're looking to have this impact their financial plan on what is really the safe math on those withdrawals. Whether that money is going to be there, hopefully to support them for a long period of time, or whether again, it is a lump sum chunks. We've said in different podcasts, we believe in that 4% withdrawal rule where if you want this money to support you for a longer period of time, you not only need to recognize what is the safe withdrawal, but again, factor in the taxes. And every time you make a lump sum distribution, it's not just the taxes, but you forever forego, what that money might have kicked off for you as some sort of income support in the future.
Adam Werner 10:35
It's the geese that way we approach that it's the geese laying your golden eggs. And if you're dipping, if you're eating geese along the way, you're always foregoing all of the future eggs that they could have laid.
Benjamin Haas 10:50
I guess the other two things that popped into my mind on just conversations, we would want to make sure we have our education that we would want to give as part of this process in answering those questions of what can I really afford to do with this inheritance? Saving is hard; it is a grind to save money to reach your goals and now when this gets put before you, there can be that euphoria of alright, this is now going to solve that goal. But we really need to bring that back to, does it? Can you really afford that? Does moving into a bigger house or doing this project? Are these the best use of that money for what it really can be? And those are conversations we want to have.
Adam Werner 11:35
That's exactly where my mind went immediately as you were saying that. It's our job to hopefully give the perspective, give the context, walk through the pros and cons of certain decisions, right? It's all about trade offs and then we can help guide somebody through that process, they can make the decision on what's going to fit best for them. But our hope is to give them enough education and information that they feel confident in making that decision knowing the trade-offs that may have to come.
Benjamin Haas 12:07
So that's going to lead me to the third thing that we should articulate as how we can help. If we talk about financial planning, we talk about education and the tough conversations on potholes are trying to avoid, then the third one, and you kind of alluded to it is that it's our job to guide someone through this process. We have checklists, we have support, and recognize this is an emotional time. And planning is important so I think the third thing that I'd want to harp on is, it's okay to give yourself some time. I think so much of this is going to be about the emotional side of needing to kind of understand what do you need to do right now, and what is okay to just kind of put on a list for “I can figure that out later,” and allow yourself to go through the grieving process or go through the education or exploratory process, the financial planning process, to then really feel like the decisions that you're making are best for you. Especially if it goes back to what would my loved one have wanted?
Adam Werner 13:18
And it certainly, like you said, we have we have the checklist, we have enough experience going through that. We know what items need to be done sooner than later. And we know the items that can be put off until that individual feels more comfortable making those big, potentially irrevocable decisions. You shared yesterday when we were prepping for this, we had a client who made a quick decision after her husband passed away, and she regretted that decision for quite a while.
Benjamin Haas 13:55
Adam Werner 13:57
So even just, again, walking through that process, it would be helpful.
Benjamin Haas 14:05
And that's where it comes back to partnership. If the question is I now receive this, again, expected or unexpected, who am I relying on, you're certainly going to interface with an estate attorney, I'm guessing somebody else that's going to notify you that you are a part of this person's legacy plan. But if you don't have a financial plan, highly recommended. Or if you know, somebody's going through this, and they aren't getting that kind of support, we're happy to talk to somebody. We're happy to help walk them through it. As he said, this is part of our job unfortunately. We've gone through it more times than we care to count.
Any other points you want to make before we kind of summarize this?
Adam Werner 14:49
I don't think so. The last thing you kind of touched on is that invariably they're going to be involved with an accountant or an attorney and it's certainly our role to be a part of that. Whoever we're working with shouldn't feel like they're out on an island and having to go through that process alone. We can certainly be the intermediary and hopefully, like you said, guide them through the process, we can be your financial quarterback to help connect all those dots between professionals.
Benjamin Haas 15:19
Let's emphasize if it's your responsibility to settle somebody's estate, and I would hope that you knew that ahead of time. But that's where we want to be support for that, because that's a huge job to take on a lot of different moving parts, a lot of different terminology. We're here to support you.
Adam Werner 15:39
Benjamin Haas 15:40
So let's wrap it up. Again, we recognize and the first things the obvious: money's emotional, and when you tie it to a person that you've lost, now you’re having to deal with the money, it's even more emotional. So financial planning, the process is to help you through that difficult transition and the emotions of it. But it does go back to the basis when we try to figure out what's the best use of this now and you kind of harped on it. It's, it's a phase of life conversation. So those checklists will be different depending on where people are and what their goals are. We're here to help you keep the main thing, the main thing. Make sure that you're avoiding some of those potholes and give yourself some time as they're just like the grief process. It's not quick and it doesn't need to be. So don't make big, irrevocable decisions with money just because now it's in your name.
Adam Werner 16:34
Well said. Thanks, sir.
Benjamin Haas 16:38
Until the next time. Bye.
Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we've always done for the show are for general information and are not intended to provide specific recommendations for any individuals to determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening
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