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The Windfall Whipsaw

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 agitate your finances and life until your nerves feel balled up like a load of wet T-shirts in the washing machine." Only they'd find a more graceful way of putting it.

What is a fantasy to many -- coming into a windfall of wealth -- can quickly turn into anything but. Inheritors often suffer from guilt and confusion or, worse, sibling rivalry and financial paralysis.

If you haven't already, you might want to prepare for this whipsaw of emotions as we become the heirs to our parents' estates -- their homes, cars, cats, artwork, stocks, and even their businesses. A 1993 study by Cornell University researchers estimates that between 1990 and 2040, there will be 115 million bequests amounting to at least $10.4 trillion in inheritances. More recently, a 1999 Boston College study puts wealth transfers between the years 1998 and 2055 at anywhere from $41 trillion to nearly $140 trillion.

The Cornell folks punctuate their findings by pointing out that an inheritance managed wisely can boost an individual's wealth by 25% or more. On the other hand, as fellow Fool Kurt Morris (TMF Speck) told me during a coffee break, "After paying child support, bills, and establishing a small emergency fund, the inheritance I got from my father's estate was enough for a nice dinner out."

Lessons from the "Go Fish heiress"
Whether it's a few grand, or a few hundred grand, most inheritances are accompanied by a slew of emotions that not surprisingly reflects the stages of grieving. Author Ann Perry has firsthand experience with the pitfalls and promises of inheriting wealth, which she describes in her new book, The Wise Inheritor: A Guide to Managing, Investing, and Enjoying Your Inheritance. Perry is the "Go Fish heiress," a quirky title referring to the royalty rights she inherited from her grandmother who popularized the first mass-marketed "Go Fish" card game.

The money from her grandmother's bequeathal as well as her parents' estate, worth $500,000, quintupled her family's net worth. It enabled them to buy a larger house, save for retirement and college, and gave the author the flexibility to become a self-employed, stay-at-home mom.

The windfall also came with feelings of guilt and elation, isolation and confusion.

No wonder. When financial gain is due to the loss of a loved one's life, it feels crass to be excited about the opportunities an inheritance affords. Perry defines these feelings as the six emotional stages of inheritance: Disbelief, anger, euphoria, guilt, paralysis, and becoming "heirworthy."

As inheritors travel this emotional spectrum, they start in a state of shock, especially when it is a parent who passes away and they are forced to become the "grown-up." Next comes anger -- anger about feeling abandoned, or even over a parent's failure to leave an orderly estate or clearly communicate final wishes. Unfortunately, as the anger dissipates, many heirs get caught in a euphoric overspending spree, writes Perry, and some don't stop until all the money is gone.

Guilt seems like a natural emotional state, especially when a bequest is accompanied by someone's death. If they haven't already blown the dough in their state of euphoria, they may be gripped by the fear of making poor decisions about what to do with the money and end up doing nothing. Or the exact wrong thing.

Gradually, Perry says, grief finally makes way for a sense of appreciation and understanding. Recognizing that the windfall has its limits, inheritors focus on wealth preservation and growth. They look towards leaving a windfall for their own children or a cause or charity.

A dollar spends the same, unless it's inherited
The emotions attached to a financial windfall play a huge role in how people manage the gift of money. Guilt accompanied by financial and legal issues makes an inheritance take on a certain 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 Carrie Bradshaw giggle with delight. First comes a new car, new couch, new Manolo Blahniks, cruise ship vacation, then -- poof! -- the inheritance is gone.

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 they are 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 her tracks.

While choices -- or financial opportunities, in the case of inheritors -- are exciting, they are not without angst. Belsky and Gilovich found that the longer a person suffering from decision paralysis defers making a decision, the less likely he is to ever get over his hesitation.

It's no wonder then that trillions of dollars -- how much of it inherited, I don't know -- just sits in bank passbook savings accounts while it could be improving the quality of someone's current life and their future financial well-being.

The emotional trip can last a long time, but so can the administrative aspects of inheriting money. One couple on the Fool's Inheritance Strategies discussion board attests to that: "Both of my wife's parents were killed in a car accident leaving four daughters as heirs. It has been three years [of dealing with the estate] for us, and it's not over yet. According to others, this is not an unusual time frame."

Readying yourself for a windfall
Here are a few tips to help ease you into your new role as an 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!) It's true, though. Another study Perry cites in her book shows that "affluent" Americans are going to get far less than you might expect. Affluent was defined as those with income greater than $100,000 and net worth of more than $660,000. They expected as a group on average to receive an inheritance of $210,000. One third of the group believed they'd come into less than $100,000. In other words, 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.

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. (Here are some tips on having this tough talk.) At the same time, don't leave your kids in the dark. You don't want to leave this world while they deal with a mess of paperwork and confusion at a highly emotional time.

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. A 1998 survey for financial products firm Lutheran Brotherhood asked participants how they would spend a sizeable 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. TMF Money Advisor members should take advantage of the financial planner on-call option to bounce ideas around. Your advisor can help you work through the tax and administrative issues of handling a windfall and make investment recommendations that best suit your financial situation.

Carefully consider your options. For an overview of inheritor issues, check out the Inheritance Strategies discussion board, where Fools are exchanging views on 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 Beanie Baby collection.

Dayana Yochim would make a striking heiress of anyone's million-dollar-plus estate, especially if it includes a vacation home in Tuscany. See if she's worthy after reading her profile, which she dutifully keeps to comply with the Fool's disclosure policy. This column has been updated from its original June 2003 version.


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  • Report this Comment On April 12, 2010, at 5:41 PM, kathleenar wrote:

    I can't tell you how much this article is helping me right now. Not only did my husband and I inherit a large home from his mother - she bought it so we could all live in it for the rest of her life, only to die a week before moving. We were taking care of her for over 8 months full time. I have been an emotional mess, not only feeling guilty for getting this, but I'm terrified of how the other family members are going to react. She made these decisions with a very sound mind, and she was stubborn. She wanted us to have the house and half of the rest of her assets. (we went to help her, and knew it would be a long haul, without ever knowing that she and her husband had any money)

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