Family enjoying time together and planning how to use inherited money.

October 09, 2019

Inherited Money? Here's How to Manage it so it Lasts

Receiving an inheritance — especially if it's unexpected or far more than you expected — can be a life-changing event.

However, many heirs are not prepared to manage such wealth in a way that will make it last throughout their lifetimes, and beyond. According to RBC's Wealth Transfer Report, only 35 percent of inheritors said they were prepared by their benefactors before receiving wealth and 36 percent said that they had received no help after getting their inheritance.

This causes roughly 70 percent of people who are left money to lose it within a few years, according to the National Endowment for Financial Education.

“One of the biggest mistakes I see people make with their inheritance is thinking they can use it as their income without planning for how that will last," said Shilpa Mirchandani, a senior wealth planner at City National Bank.

Sitting down to plan how you'll spend your inheritance may seem boring compared to splurging on a luxury car or a new home. And understanding the nuances of managing significant wealth can be completely overwhelming. But if you want to make your inheritance last, detailed planning is required.

Establish a Foundational Estate Plan

Many heirs of significant wealth are young. According to RBC's Wealth Transfer report, the average age of people receiving money from a grandparent is 29 and the average age is 44 when inheriting from a parent. If you're on the younger side, you may not think about creating your own estate plan after getting an inheritance, but that actually should be your first response.

"If the inheritance is distributed outright and not as a part of a trust, you should establish a plan for your estate to ensure that the newly acquired wealth is protected and preserved," said Nichole Walker, City National Bank's senior wealth planner.

Walker said that two items should be considered as part of this plan: a revocable living trust and a pour-over will.

The revocable living trust is typically created to avoid probate, to distribute assets privately, to protect assets if your beneficiary becomes ill or disabled, or to provide professional investment management.

"A revocable living trust may be revoked or amended at any time, and all assets held in it will be included in your estate for estate tax purposes. At death, the provisions of the trust will become irrevocable," she added.

A pour-over will, on the other hand, allows for any assets that aren't named or properly titled in a revocable living trust to be included in that trust. "It provides the individual's estate with an extra level of protection," Walker said.

Plan for Longevity

After you've established initial protection for your inherited wealth, you'll also want to consult with a wealth planner to discuss how you'll use the inheritance.

“Many factors may impact your decisions, like the amount and timing of the inheritance, lifestyle spending, whether you anticipate any large cash outflows in the coming years, other sources of income, your current age and health, and most importantly your goals and values," Mirchandani said.

She also noted that it's important to consider whether you want to use the entire inheritance or pass a portion to your heirs.

Regardless of how you plan to use your inheritance, there are several factors to consider beyond simply saving and spending to ensure that you're able to achieve what you'd like. A wealth planner will play a crucial role in ensuring you're looking at the full picture and have an plan to make it last.

Identify Which Assets to Keep and Which to Consolidate

Sometimes an inheritance is more than cash. It may include anything from real estate to valuable art or collectibles.

If you're unsure about which assets to keep and which to consolidate, Walker suggested listing all of the assets and categorizing them as "legacy" or "non-legacy," and determining which ones hold sentimental value and which ones do not, taking into consideration the needs of future generations and what assets may tell the family history of the generations that came before.

Next, she recommended looking at the individual tax implications of maintaining, selling, gifting or donating the various assets. This will require a team of professionals, such as a wealth planner, CPA and possibly an asset specialist (such as an art appraiser) who can help you weigh your options.

Not only will your team of professionals bring the expertise needed to guide you on which assets would make most sense to keep and which to consolidate, they can also provide you with options for hiring additional people to help handle those assets. For example, they may refer you to a chief financial officer who can manage commercial real estate investments that may be valuable, but that you simply don't have the expertise or interest to manage yourself.

Protect Your Assets

Wealth protection may be a new concept if you've never managed significant wealth of your own, but it's critical to making your inheritance last.

One way to protect all of the assets associated with an inheritance, especially if it's significant, is to have an asset protection trust.

"This is used as a tool of risk management by high-net-worth or high income individuals who are in professions that are prone to frequent and frivolous litigation," Walker added. She said that it's common for long-lost family members, divorcing spouses or creditors to catch wind of an inheritance and angle for a piece of it.

The asset protection trust, therefore, shields against future claims from unknown parties.

For further protection, Walker also added that a prenuptial agreement can provide peace of mind. "This can create an explicit plan for the process and treatment of specific assets, so that you can avoid relying on the law to figure out community property or common law property in the resolution of financial matters," she continued.

If you've recently inherited money or you are anticipating an inheritance, City National's wealth planners can help you formulate a financial plan to make it last. Learn more about our wealth planning services.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances.