If you’re fortunate enough to be able to leave your closest loved ones a sizable inheritance, you expect they’ll use it to provide things they may not otherwise been able to afford for their families – and for themselves. The sad reality is that on average, people spend their entire inheritance within five years if they don’t invest it wisely. Typically, that means putting it in financial instruments like a mix of stocks, bonds and money market funds or in real estate, like a first or second home or investment property.
Too often, people who aren’t used to having a large sum of money at their disposal are overwhelmed by an inheritance. It doesn’t have to be millions of dollars to be overwhelming. A $10,000 inheritance can be overwhelming to someone who’s never had that kind of money before.
Helping loved ones avoid costly mistakes
If you have a loved one, like a young adult grandchild, whom you think can’t be trusted with the inheritance you want to leave them, you can put the money in a trust so that it’s disbursed gradually and/or for select purposes (like school) according to your instructions. This can also allow it to grow in the meantime.
However, if you simply believe that your loved ones need some direction and preparation to handle their inheritance wisely, one of the most important parts of your estate planning should be talking with them about their eventual inheritance. While you likely don’t have exact numbers, you can give them ballpark figures so they aren’t shocked. It’s also smart to connect them with a financial planner who can help them make wise decisions or make sure they get one of their own.
Common mistakes that can devalue an inheritance
With smart financial planning, they can avoid common mistakes people make with their inheritance. This includes:
- Leaving the cash somewhere it’s not earning interest or dividends for too long
- Buying a large expensive asset like a home, car or boat without considering the maintenance and other long-term costs
- Keeping an inherited property they don’t need and can’t afford rather than selling it
With the holiday season not far off, this is a good time to start thinking about your estate plan, if you haven’t already, and prepare for some conversations with your family when you’re all together. One of the most valuable inheritances you can leave them is sound guidance for handling the assets you’ll be handing down. With sound estate planning assistance, you can help your estate avoid unnecessary taxes and expenses.