Estate Planning

Managing an Inheritance

There are several factors to consider before putting an inheritance into the stock market.

Even experienced financial advisors can get caught up in the complications of dealing with an inheritance. After receiving an inheritance from his mother that included stock in a mining company she favored, it took Ken Moraif months to sell the shares, even though they were losing value.

“I had to get over the thought that this is selling my mom,” says Moraif, senior advisor with the wealth management firm “It’s a very strong emotion.”

On average, American retirees planning to leave an inheritance anticipate giving about $177,000 to their heirs, according to a 2013 report by HSBC. A fifth of legacies left to children in the U.S. were expected to exceed $390,000.

Such sums of money can provide huge benefits. But the chunks of cash that often coincide with emotional loss can also open up complicated investment choices.

While there is no one-size-fits-all plan, there are several factors to consider before putting the money into the stock market.

First, get some help.

The planning process starts before the money comes in, Moraif says. That may involve talking to an estate planning attorney – ideally the same one who worked with those giving the inheritance.

Also, heirs should look for certified financial planners who work for a registered investment advisor, meaning they have a fiduciary duty to their clients and are not commissioned salespeople, he says.

For people who inherit a sum bigger than what they’ve managed before, Moraif cautions: “Don’t do it yourself. You could end up losing it all.”

While some inheritances may be fairly straightforward, some, especially those involving larger sums, can involve trusts that need to be funded properly, he says. Simply moving the money into the heirs’ names can set them up for avoidable taxes and expenses, he says. Cashing in an inherited individual retirement account early could leave one paying a mound of taxes. And there may be surrender penalties involved with annuities or taxes on their gains.

For heirs in their 50s or 60s who inherit a portfolio from octogenarian parents, its likely that the risk profile of the investments is more conservative than is desirable, Moraif says. Some of the holdings the parents may have owned for years may no longer be sound investments, such as a company that pays a small dividend but whose stock hasn’t changed in value for 15 years, he says.

After assessing the portfolio’s appropriateness, it becomes a basic financial planning exercise based on an heir’s risk profile, financial goals, tax bracket and retirement target, he says.

Pay off debt and start saving.

But for many, it may be wiser to pay off debt and establish savings before thinking about investing in the stock market.

“Today, with so many Americans facing significant debt, little savings, and ill-prepared for the costs of retirement … this windfall serves as the reset so many are looking for to help them get back on track with their financial lives and develop better financial habits in the future,” says Tracy Sherwood, a senior financial advisor with the financial planning firm Ogorek Wealth Management in Williamsville, New York.

There’s no investment one can make, short of taking on substantial risk, that will earn as much as the 16 percent someone may be paying on credit card debt, says Janet Briaud, founder of Briaud Financial Advisors in College Station, Texas.

One caveat on paying off credit card debt involves serial credit card users, according to Moraif. If a person knows they will probably run up their card again, it’s best to not let an inheritance get sucked into their consumption habits, he says. In that case, it’s better to let the credit card limits constrain spending, he says.

After paying off credit card debt, Briaud encourages clients to look at other debt, such as high-interest college loans.

“Paying off the loans is the same as earning a risk-free rate equal to the interest rate on the loan,” Sherwood says.

Paying down a mortgage is also an option, but Sherwood says most people have probably already refinanced at an attractive rate, given the low interest-rate environment.

Next, establishing savings is key. Depending on how secure one’s job is, Briaud recommends keeping an emergency fund of three to six months of living expenses in a savings account, certificate of deposit or short-term Treasury bills.

Also, people should use the money to maximize, increase or start retirement savings through an employer-sponsored retirement plan or IRA, Sherwood says.

Even though it is necessary to separate emotions somewhat from investing decisions, Moraif adds that a certain amount of reflection is healthy.

“What really breaks my heart with inheritances is when the person who inherits the money squanders their parents’ life’s work,” he says. “You have a certain responsibility to the person who left you the money to be a good steward with that money.”

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This thought piece is featured courtesy of, Written by Matt Whittaker on Nov 5, 2015

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