Learn the key points of discussing an inheritance with young adults, plus actions they should consider to help it last for years to come.
Talking to your grown children about an inheritance—along with recommended actions to manage it successfully—could help them avoid squandering what could be a major long-term benefit. One study shows that adults who receive an inheritance typically save just half, while spending, giving away, or losing the rest.1
“The inheritance quickly turns into a new boat or kitchen remodel,” says Daniel Prebish, Director of Life Event Services for Wells Fargo Advisors. “While those things may be appropriate for part of the inheritance, if you speak to your adult children about having a plan and setting priorities about what to do with their gift, an inheritance can also be transformative and make a lasting positive impact.”
Prebish recommends talking to your adult children before they receive money from an inheritance, sale of a business, or other means, to help them be better prepared to successfully manage those potentially life-changing dollars. That’s especially so if they have been named beneficiaries of a trust and are expected to receive a lump sum at a certain age.
To make the conversation easier, Prebish offers the following talking points to consider.
Don’t rush into any spending decisions. Remind your children that if they receive an inheritance, they may also be coping with the loss of a loved one. People have a tendency to make rash decisions when they’re emotional, so encourage them to deposit the inheritance in a deposit account until they’re able to weigh their options.
Consider investing some or all of it. Investing could potentially help your children turn a small inheritance into a larger amount that can support their financial priorities over a lifetime, Prebish says. To help them understand the value of investing, Prebish recommends sharing the Rule of 72: Dividing 72 by the annual rate of return, you get a rough estimate of how many years it will take for an investment to double. Assuming a 6% hypothetical rate of return, for instance, invested money could double in 12 years. “What the money is worth today is one thing,” Prebish says. “But if they consider what the money could be in the future, that’s pretty significant.”
Think about goals and priorities. While buying a fancy new car might be tempting, remind your children that they can also use the money to help reach loftier long-term goals and dreams. Could they retire five or 10 years earlier than they have been planning to if they put inherited money in a retirement account? What if they used it as seed money to start the business they have always dreamed about? Or how about investing in a 529 college savings plan to help their kids pay for college?
Consult financial professionals with relevant specialties. A financial advisor could help your children develop a strategy to make the most of their inheritance and consider the pros and cons of different options, Prebish says. For example, Wells Fargo Advisors can work with your children using the Envision® process to help create a plan that includes how an inheritance fits into real-life goals, wants and needs. “A financial advisor can help them make thoughtful decisions, including how those decisions would impact them five, 10, and 20 years into the future,” he says.
Prebish also suggests working with a tax professional and an estate attorney. Though most inheritances aren’t subject to the federal estate tax, some beneficiaries may end up owing on the taxable income earned by the estate while it’s administered, he says. A few states still impose estate taxes, as well.2 In addition, a tax professional can advise on which account types or investment categories offer the most tax efficiency and align with the beneficiary’s overall financial circumstances.
Another topic your children should discuss with an estate attorney: how to title their new assets, especially if they live in a community property state. In some situations, Prebish says, to protect these assets from being divided in the event of a later divorce, it could be wise to keep them as separate property.
1 “Losing an Inheritance Is Easy, Because Saying No Is Hard.” New York Times, September 9, 2019.
1 “State Estate Taxes.” www.nolo.com. Nolo, January 16, 2020.
Wells Fargo Advisors does not provide tax or legal advice.Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.