Training your family to handle inheritance

By David Jackson, MBA, CFP^®, C(K)P^™, Managing Partner – Investments, Southern Springs Capital Group

One of the most challenging situations that I run into in my financial advisory practice is advising someone that suddenly comes into a large sum of money. It could be a lottery winner or an athlete that receives a large signing bonus. But in most cases, it’s someone who has inherited a substantial sum from a family member.

I could provide you statistics on how much wealth is likely to be inherited over the next 10-15 years, but let’s just say it’s substantial. The habits of wealthy families tend to be passed down from generation to generation. Some of those habits include saving and investing regularly, minimizing debt on assets that tend to depreciate and seeking good investment advice.

However, most wealth is what I would refer to as “first generation” wealth. It is not inherited. It was from a business venture that was successful, or from a job where the company stock did extremely well and was accumulated through purchase, or stock options, or just from very successful investing.

When “first-generation” wealth is inherited, sometimes the generation inheriting the money has not always developed great financial habits. In these cases, the inheritance can be a little bit daunting to the inheritor. If you have generated “first generation” wealth, it can be tricky training the next generation on how to handle it.

One thing you can do is to not wait until death to leave everything to your heirs. Consider gifting them some funds or investments while you are living. It gives you a chance to see how they handle it.

Do they spend it immediately? Do they re-direct it in investments of their own choosing? Do they start their own business with it? If you have more than one future heir, did some heirs handle their gifts better than others? The answers to these questions will lead you down the path of better estate planning.

If your heirs handle it well, consider doing more of it where appropriate while you are living. You can also be more comfortable bequeathing assets directly to them in these cases.

If an heir has not handled it well, consider what went wrong before trying again. Also, in these cases consider using trust language in your estate planning. Yes, it’s ok to leave assets to some heirs directly and to others in trust. In all my years of working as a financial advisor, I’ve never seen anyone upset that someone left them a trust fund.

While I’m primarily speaking about the behavioral aspects of inheritances, anytime you are doing formal estate planning, it is important to seek the counsel of a qualified professional regarding the legal and tax implications for your specific circumstances.

For more information on Southern Springs Capital Group, visit www.southernspringscapital.com. Our offices are located at 2555 Meridian Boulevard in Franklin. We can be reached at 615-905-4819.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc., member FINRA / SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Southern Springs Capital Group is not a registered broker/dealer, and is independent of Raymond James Financial Services.