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. After all, more and more of us are becoming the heirs to our parents' estates -- their homes, cars, cats, artwork, stocks, and even their businesses. An old study by Cornell University researchers estimated that between 1990 and 2040, there would 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 a co-worker once 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, reflect the stages of grieving. Author Ann Perry has firsthand experience with the pitfalls and promises of inheriting wealth, which she describes in her 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 parent's 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. People treat this 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 Imelda Marcos 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 he or she 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.
Paralysis is just one pit stop on the path most inheritors travel. The six stages, according to Perry, are: disbelief, anger, euphoria, guilt, paralysis, and becoming "heirworthy."
As inheritors travel this emotional spectrum, they finally end up with a sense of appreciation and understanding. Recognizing that the windfall has its limits, inheritors focus on wealth preservation and growth. They look toward leaving a windfall for their own children, or for a cause or charity.
Gracefully getting to the final stage can be a struggle.
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 incomes 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 them to deal with a mess of paperwork and confusion at such a highly emotional time. It doesn't only have to be about passing on your valuables. An ethical will is a wonderful way to leave a thoughtful legacy and true piece of your heart to your loved ones.
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 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. In the meantime put that money into a short-term savings vehicle that will keep your money safe from inflation and market ups-and-downs.
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.
Ease the administrative burden: 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." If you don't know what to do with the money, seek the help of a trusted pro. An 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.
Don't invest like your parents. Just because you inherited a portfolio of utility companies or shares of Ford
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 article originally ran in 2003 and has been updated to be a bit zippier.