You've worked hard for your money and you're planning on leaving a legacy to the important people in your life. But what happens after you're gone? The reality may not live up to how you pictured it.
You may think that leaving money to your loved ones will make a notable difference in their lives but according to a study "more than one-third (34.9%) of all inheritors saw a decline or no change in their wealth after getting an inheritance" 2. This statistic is quite counter-intuitive. How could leaving a significant sum to a beneficiary not make a difference?
Often, beneficiaries of inheritances view it as "free money" and begin planning how they're going to spend it before it's even in their own account.
Money takes a long time to accrue and very little time to spend. Beneficiaries give money away to friends and family, buy the new car or home they've been lusting after or go on expensive vacations. Soon enough, they're right back where they started.
"One study found that adults who receive an inheritance save just half, while spending, donating or losing the rest; nearly 20 percent of baby boomers who received $100,000 or more spend their entire gift" 1.
But what are you going to do about it? After all, you aren't going to be around to dictate what happens. Think about this - a lot of beneficiaries have not dealt with large sums of money in the past. Without experience in investing and saving, they sometimes find themselves blindsided by an amount of money they've never had before and don't know what to do with. They may not have even known that they were going to receive any money!
A way to alleviate this issue is to bring your beneficiaries into the conversation. Preparing them now can allow your gift to make an arguably more meaningful impact in their lives. If you have a financial advisor, invite your benes to a meeting! Encourage them to engage in financial planning themselves and build a strong financial foundation. That way, once the time comes for their inheritance, they'll be ready.
At a base level - who are your beneficiaries? What does your trust state? What does your will say? Are they in alignment with each other? Are they in alignment with your wishes, today?
Life changes and so should your beneficiaries.
It is a common mistake to designate a beneficiary or establish a trust and then just file away the paperwork. I've seen trusts that were established in the 90s and then.... nothing. If nothing at all has changed in your life (which would be incredible) - you still need to reevaluate your estate documents! You may not have changed, but laws do. For example, the SECURE act of 2019 eliminated the stretch IRA, instead requiring that beneficiaries withdraw the funds from an inherited IRA within ten years. This change has significant tax consequences that your trust from 1999 has no idea about.
I generally recommend that you update your estate documents every 3-5 years or after any significant life change. Life changes include things like divorce, bereavement, marriage, or moving. Or perhaps you merely changed your mind - that close friend you designated as a beneficiary isn't in your life anymore and maybe you don't want to leave them half of your estate after all.
Change happens so slowly that we may not realize the extent of it - and how much we need to reevaluate our estate plan.
When you think of trusts and estate plans, your mind may immediately go to attorneys. That's correct, but did you also know that your financial advisor is a key part of the process? It's important to include your advisor for many reasons, including ensuring that your estate documents align with the beneficiaries on your accounts and to help the legacy you picture become reality.
Whether you have an older estate plan that needs updating or you haven't even begun the process, I encourage you to take action sooner rather than later. After all, don't you want to make sure you're leaving a legacy you're proud of?
Life can be unpredictable, but your estate plan shouldn't be.
2. Zagorsky, Jay. Do People Save or Spend Their Inheritances? Understanding What Happens to Inherited Wealth. https://documentcloud.adobe.com/link/track?uri=urn%3Aaaid%3Ascds%3AUS%3A2224e27a-e3b5-4706-b4e7-91a95d06250b#pageNum=1
This is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. (10/20)