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Friday, 1 May 2009

The Dark Side of Inheriting Money

By Dayana Yochim Dayana Yochim

There's an old saw that goes something like this: "Money suddenly gained often drains away, while money earned gradually stays with you."

Perhaps the keepers of old sayings should add: "And money that you inherit will make you feel more agitated than a load of wet T-shirts balled up and making a racket in the washing machine." Only "they" would find a more graceful way of putting it.

Who doesn't like getting money?
It's no surprise that dealing with an inheritance is one of the most popular topics handled by financial advisors. There are all those tax and legal issues of handling a windfall and investment decisions to be made.

Then there are the less tangible aspects of coming into money -- guilt and elation, isolation and confusion.

Such emotions play a huge role in how people manage an inherited windfall. What was once viewed simply as currency suddenly takes on an unattractive pallor. People treat this tainted money as if it somehow spends differently than the money our employer direct-deposits into our checking accounts. For some, it becomes fun money as they get caught up in a spending spree that would make Michael Jackson giggle with delight (until the money well quickly dries up). Others simply freeze.

Why Smart People Make Big Money Mistakes authors Gary Belsky and Thomas Gilovich found that the more choices a person has, the more likely he is to do nothing. It's called financial paralysis. And it's not too much of a leap to see why coming into a windfall would cause someone to freeze in his or her tracks.

Readying yourself for a windfall
With a little foresight you can be that smart heir who truly honors the person who left money to you.

The most important thing to consider is how to redeploy the money where it works best for you -- not your forebear. This means considering tax issues, stepped-up cost bases, and even the emotional attachment you may feel to your grandmother's investments in GE, for instance.

Here are some general tips to help you be a smart heir or heiress:

Do not put your life on hold, waiting for the windfall. We're living longer, and health-care costs are skyrocketing. Or, as a friend of mine likes to say when she jokes with her parents, "Don't break your hip. You'll wipe out my inheritance." (Her parents laugh at this joke. Really, they do!) In practical terms, live your life, save like nothing's coming to you, and be grateful if your loved ones are able to leave you a small gift of money. The operative word here is "small," particularly given the stock market's recent performance.

On the other hand, be as prepared as you can. It can feel weird to bring up the topic, but it's important to be open with your older relatives about their final financial wishes. At the same time, don't leave your kids in the dark. You don't want to leave this world and make them deal with a mess of paperwork and confusion at a highly emotional time. Start with this list of must-have documents.

Chill out, but don't freeze in your tracks. It might not be a bad idea to institute a waiting period after inheriting some money. It allows you to work through some of the emotional stages and approach a windfall with a cool head. Awhile back, one survey from a leading financial firm asked participants how they would spend a sizable windfall. Here's the shopping spree breakdown: home (31%), education (30%), vacation (10%), car (9%), help children/family members (3%), pay off debt (2%), invest it (1%). What would you do with a windfall? Consider your options now before you are faced with the array of possibilities.

Treat it like you would any other money. A dollar spends the same, no matter where it comes from. If you don't have an emergency fund, use some of your windfall to start one. Pay off your credit card debts or any other high-interest loans. Think about the future, too, and stash some of the gift away for the long term.

Don't invest like your parents. Just because you inherited a portfolio of utility companies from your parents doesn't mean that you need to keep the cash parked there. Chances are, you are in a different tax bracket than your parents and are in a different stage of life. Your investments should reflect your needs. If you don't know what to do with the money, seek the help of a trusted pro.

Carefully consider your options. For an overview of inheritor issues, check out the Inheritance Strategies discussion board, where Fools are discussing everything from how to split an inheritance to how to cash in a gold bar that pre-dates the Roosevelt administration.

With these steps, you can avoid the agitation that too often comes with an inheritance, and clear some shelf space in the guest room for your dad's prized Matchbox car collection.

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