Many people rejoice when receiving a bountiful inheritance. Whether their advisors are equally ecstatic frequently hinges on one question: How the windfall will impact the clients financial discipline and long-term planning.
A clients actions, advisors say, will depend in some measure on the inheritances size relative to existing assets. An individual of modest means, notes Steve Zimmerman, a partner at Zimmerman Financial Group, Apple Valley, Minn., will tend to view a bequest of $100,000 more seriously than the high-net-worth client whose assets are valued in the millions of dollars.
Age and emotional attachment to the dead are also considerations. Producers observe that many boomers become more conservative as they edge closer to retirement, regardless of the prospect of an inheritance. Many also feel obligated to honor benefactors by wisely managing passed-on assets.
Some folks, to be sure, move in the opposite direction. Gary Rathbun, an advisor with Private Wealth Consultants, Toledo, Ohio, points to several clients who quit their jobs and quickly burned through inheritances, leaving themselves in a financially precarious position. Rathbun says he has little tolerance for those who are financially irresponsible.
“Sometimes you have to shock [the client] and say, If you keep down this path, in two years youre going to be broke. Now, let me explain what broke is. When they dont respond, Ill tell them, Look, you need to work with somebody else, because Im not going to oversee a downward spiral.
“People have this image of living like Paris Hilton,” he adds. “They think they have an ungodly amount of money that will never end.”
Many boomer clients also make incorrect assumptions about an inheritances size and disbursal date. Often, advisors say, clients dont count on aging parents still in possession of assets to bequeath living as long as they do and many automatically assume that parents will predecease them.
Or clients dont factor in unanticipated liabilities that can drain the inheritance: estate taxes, medical expenses, or the long term care needs of elderly parents. For all these reasons, observes Rathbun, advisors should counsel boomer clients not to incorporate an inheritance into their financial planning.
“I can give story after story where people didnt die in the order they should have or where the [inherited] resources were used up taking care of Mom,” says Rathbun.
And the latter, producers say, can lead to frictions between beneficiaries conflicted over how much care to give a parent in declining health. Tensions also can run high when marriages fall apart and estranged or divorced spouses cannot agree on the disposition of inherited wealth.
Jim McAllister, an advisor and president of Professional Planning Associates, Yarmouth, Maine, counsels clients, including those who are happily married, against commingling funds with spouses assets. One option to consider: to place bequests into a trust, naming oneself and (if applicable) ones children as the beneficiaries. The client also should designate a disinterested third party as the trustee.
Should the client later divorce, the trust assets will be protected from claims from the other spouse, limiting potentially substantial liabilities. McAllister cites one client who, because he failed to use a trust, had to part with $500,000one-half of his inheritanceand pay alimony and child support to his ex-wife.
The trust offers additional protection. Richard Martin, vice president of advanced marketing at The Phoenix Companies, Hartford, Conn., says the vehicle can insulate boomers with legacies from tax laws in constant flux.
“If the client says, I dont want to change my financial plan every time the tax laws change; how do I fix that? The advisor can suggest using the inheritance to buy a life insurance policy that will reside inside a trust,” says Martin. “No matter what happens with the tax laws, there will be this fund of money to help clients accomplish their goals.”
To be sure, some boomers, no matter how wealthy an inheritance has made them, will reject this approach. Thomas Spitzer, president of Portland, Ore.-based Summerville Advisors, observes that selling life insurance for its estate liquidity benefits can be a challenge when dealing with clients who havent previously purchased a policy or who bought life insurance for income protection only.
With or without a life policy and trust, financial planning recommendations initially should be simple and straightforward so as to not overtax inheritance beneficiaries still grieving over the death of a benefactor. Later, the recommendations can be revised to leverage more advanced planning techniques.
“None of the early phases clients pass through following the death of a loved onedenial, anger and depressionallows for sharp decision-making,” says Susan Zimmerman, Steve Zimmermans wife and partner. “So, while theyre still in distress, the advisor will have to tailor the recommendations in small bites and with familiar investment choices.”
Reproduced from National Underwriter Edition, January 27, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.