Suddenly Wealthy: Helping Clients with Unexpected Inheritance

by Rose Watson, JD, MSEL, Commonwealth Financial Network

When your clients receive an unexpected inheritance, they could experience a variety of feelings. Some will have trepidation about managing large amounts of inherited money. Others may be dealing with feelings of grief at the loss of the individual who left them the money. There may even be guilt at benefiting from a loved one's death. These uncomfortable emotions can paralyze some beneficiaries with indecision and lead others to take premature, ill-considered action.

As a financial advisor, helping clients with unexpected inheritance starts by understanding how people react to being "suddenly wealthy."

Take It Slow

Although it's important to safeguard the inheritance, it's also necessary to provide a "cooling-down" period for your clients:

• Avoid suggesting that they take any action too soon.
• Reassure them that you will address the priorities now and that, over the next few months, you will create a long-term plan.

Of course, the length of this cooling-down period will vary depending on whether your client is a widow/widower or someone who is younger and unmarried.

Proceed with Caution

A client who is new to having a large sum of money should be advised to proceed with caution. He or she may be besieged by family and friends suggesting "good deals" and "not-to-be-missed" opportunities.

• Assure your client that there will be equally attractive deals in the future.
• Stress that there is no hurry to make this kind of decision until more pressing issues have been settled.
• Offer to meet with important people in your client's life to go over their ideas or review any financial decision that your client is considering.

From Pressing Matters to Possibilities

Even during a cooling-down period, some things can't be ignored. Bills have to be paid, deadlines met, financial accounts registered, and beneficiaries changed. To help keep things organized:

• Segregate enough money to cover current needs and to establish a sufficient emergency fund.
• Provide a list of important dates (e.g., when final required minimum distributions should be made from the deceased's retirement accounts or the filing deadlines for tax forms).

Set aside a separate and future time to discuss goals. It's natural for someone who receives an inheritance to wonder what to do with the money. Encourage your client to ask the following questions:

• What was important before I received this money? Are those goals still priorities?
• What does this money allow me to accomplish now that I couldn't do before?

For example, some clients may want to feather their own nest or create a financial safe house. Others may want to make a difference through a charitable gift, do something deeply inspiring, or help a family member purchase a home.

Creating a Legacy

For those clients who want to achieve philanthropic goals, there are a number of avenues available. You might consider partnering with a charitable administrator, which would allow you to manage your clients' charitable assets on a fee-based platform or in commission-based brokerage accounts. Also, inform your clients of the various options they have for charitable giving, including establishing the following "vehicles for giving":

• Charitable remainder trust
• Donor-advised fund (DAF)
• Charitable foundation

Family Ties

As previously noted, many heirs have a strong desire to do something for their families. After all, it can be emotionally satisfying to enable younger generations to pursue their dreams. Your client may want to use the money to start a business, provide a family member with the financial freedom to do social good, or support a child with special needs. In any case, establishing a trust can help achieve his or her goals.

• A traditional trust pays all net income to a surviving spouse and, at the spouse's death, distributes each beneficiary's share of the trust's principal as he or she reaches a certain milestone (e.g., reaching age 30).
• A more flexible version of a traditional trust gives the trustee discretion to make distributions as needed.

Another option is to establish an irrevocable trust. I once worked with an advisor who helped his client, a banking heiress, divert a portion of an inheritance to an irrevocable trust with incentive features. The client wanted the beneficiaries to be financially comfortable but not have a lifestyle so lavish there would be no incentive for productive or creative activity. She funded the trust with a $1 million one-time gift, which was subsequently invested in a life insurance policy.

• The trust provided the trustees with cash for current expenditures.
• The life insurance replenished the trust at the insured's death.

Essentially, a family bank was created where beneficiaries could apply for and prove the merits of their distribution requests.

Trusts can have a charitable element. A trustee can be authorized to distribute to charity any income in excess of the beneficiaries' needs. Further, beneficiaries can be encouraged to research and make recommendations for grants to charities.

Trusts may last for several generations. Ideally, the trust document will be written broadly enough to be flexible. One way to deal with changing family needs is to name a trust protector and an independent administrator.

• A trust protector can be a senior family member or friend who can amend the trust to meet future unforeseen needs.
• The independent administrator can be a trust company (e.g., Fidelity Personal Trust Company) that recognizes the importance of a third-party investment advisor.

Financial Confidence

To be sure, your clients have many options when deciding what to do with their sudden wealth. As a financial advisor, however, your most important task is to help them find financial confidence in their own way and in their own time. You can render an indispensable service by helping articulate how they feel about their inheritance and exploring what this newfound wealth could achieve for their families and communities.

What other guidance do you offer for helping clients with unexpected inheritance? Which options are most popular? Please share your thoughts with us below.

Commonwealth Financial Network^® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

Commonwealth Financial Network is the nation’s largest privately held independent broker/dealer-RIA. This post originally appeared on Commonwealth Independent Advisor, the firm’s corporate blog.

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