A significant portion of heirs burn through their entire inheritance within a year, and it's different than the outcomes for other windfalls, new research shows.
The study, from researchers at Texas Tech University and the University of Alabama, found that 42% of heirs "had their net worth fall back to, or below, their pre-inheritance level when measured about 12 months later. In plain English, they had immediately blown it all," one of the authors said in a recent LinkedIn post.
The findings, which looked at heirs ages 50 and older, should change the way that advisors help their clients make estate plans, Russell James suggests, noting that many heirs view an inheritance as "death money."
"This propensity to immediately spend the entire inheritance is high. In fact, it's higher than with ANY OTHER type of financial windfall" when controlling for windfall size, wrote James, a charitable financial planning professor at Texas Tech. "This isn't normal windfall behavior. It's extreme behavior."
Advisors miss the the "mortality salience" phenomenon, a death reminder triggered by a loved one's passing that most people want to avoid, he explained. People want the death reminder to go away.
"And with inheritances, that's often what happens," James wrote. "The death money goes away. Often it goes away very quickly."
The average inheritance in the data studied was $133,000, James said on LinkedIn.
Advisors and clients involved with estate planning don't attach emotion to the money being left to heirs, he added.
"The money is just money," James wrote. "And the plans reflect that. "
They view a quick and tax-efficient wealth transfer as a success, he noted.
"Except that's not how it works in reality. Psychologically, the worst possible time to leave money to your loved one is at your death. That's when emotions are at their highest," James wrote. An heir may be "good with money" but approach money from a loved one's death differently.
Advisors should ask clients how much they want transferred to heirs in a lump sum and how much over time, James recommended.
"Simply put," he wrote, "it's important to give the heirs more than one shot at their inheritance."
Some heirs, in contrast, saved all their inheritance, seeing it as a path to reinforcing their family's permanence by passing it along themselves, James noted.
Notably, only 15% of heirs spent some money and saved some money. The rest either saved or spent it all, the research found, with 43% saving it all.
"For older adults who simultaneously confront their health shocks and the loss of a parent, both impulses intensify: immediate consumption can mute death-related thoughts. At the same time, total preservation offers a symbolic extension of self and family legacy," the research paper says.
Michael Finke, investments and retirement professor at The American College of Financial Services, shared the research in a post on LinkedIn, writing that it aligned with his own.
Finke and Tao Guo, retirement research director at Morningstar, found several years ago that "free spending (grasshopper) beneficiaries spent an extra $265 for each $1,000 they inherited that year. In other words, the inheritance would last less than 4 years," Finke posted.
"Do you have a grasshopper kid? If you want the inheritance to last, don't just dump a bunch of cash in their lap," he wrote.
Image: Adobe Stock
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