The Overlooked Reason to Prepare For an Inheritance

My Millennial money tips this month focus on 529 plans, why you should prepare for an inheritance, and how to spend down your investments

Inheritance. The word itself feels packed with promise. What a luxury, what an opportunity. So, of course, you shouldn’t expect or prepare for an inheritance. That suggests entitlement, maybe a lack of gratitude.

But some (fortunate) Millennials probably would advise you otherwise.

You don’t prepare for an inheritance primarily for financial reasons. Rather, you prepare for the emotional baggage that often accompanies the inheritance.

*Editor’s Note: I originally published this article in my Millennial finance newsletter, which you also can get twice each month (for free) by adding your name here*

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Millennial Inheritance Coverage in the Media

News articles now regularly tout a forthcoming “Great Wealth Transfer.”

In a recent example, the New York Times reported that, “The silent generation, or people born roughly between 1928 and 1945, and its successors, the baby boomers, are expected to transfer significant wealth to members of Generation X and millennials over the next 20 years.”

Yet, author Ben Carlson points to University of Pennsylvania research showing that only one in ten people typically receive an inheritance. And people who are already wealthy (more than $5 million in liquid net worth) will “receive 42% of the money that gets passed down.”

So you may not receive much inheritance, after all. Even so, all Millennials should think through how an inheritance would impact their life.

You can consider the financial implications, of course. But you also may want to consider what feelings may arise as a result of that inheritance.

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Prepare For an Inheritance to Surprise You in Unexpected Ways

My colleague, financial advisor Elliott Appel, lost his dad to lung cancer in 2023.

Elliott thought that he might receive a small inheritance. But he lacked specifics due to his dad’s potential health care costs.

Still, as a financial advisor, he assumed that he would be “unbothered” by an inheritance. That’s nearly the opposite of how he ultimately felt:

“Inheritances require careful planning because research has shown people don’t make the best decisions with large sums of money received at once, but I wanted to deal with it and move on. 

It felt like if I did something with it, I wouldn’t have to process my emotions around it. 

Which brings me to how I felt — somewhat guilty. 

It’s strange receiving a chunk of money when someone dies. My inheritance was not a life changing amount of money for me at this stage of life. It would have been when I was younger, but it didn’t impact our daily living. 

I don’t know how else to put it other than receiving money because someone died can feel strange.” 

Financial advisor Katherine Fox has witnessed the same dynamic. In the New York Times article on managing an inheritance, she says, “I see a wide variety of preparedness levels. An overwhelming majority are totally unprepared to inherit, and, when money actually comes, don’t know what to do.”

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5 Key Steps That You Can Take to Prepare for an Inheritance

No matter how much money you receive as part of an inheritance, you think ahead of time about how you will manage the situation. The most successful preparation will include both quantitative and qualitative considerations:

1. Make peace with the idea that receiving an inheritance will feel stressful
2. Wait 4-6 months before using any of the money
3. Spend up to 5% of the inheritance on a purchase that will bring you joy
4. Donate a portion of the inheritance to a cause that honors your loved one
5. Give yourself time to think through how you want to use the inheritance

Inheritance Stress

As the New York Times points out, you may currently feel stressed about buying a home or paying off student loans. An inheritance certainly can help with these challenges. But making decisions about the inheritance itself may leave you feeling just as stressed.

Pause Before You Take Action

When you receive an inheritance, you’re likely still mourning the loss of a loved one. As Elliott Appel described, he also felt guilty about receiving the money. Giving yourself time to come to terms with the situation can lead to better long-term financial decisions.

Honor Your Loved One by Bringing Yourself Joy

Your loved one likely would prefer your money to go to “good use.” That phrase can have different meanings. But many people would agree that some amount of happiness or joy counts. You don’t need to spend much to put a smile on your face and feel gratitude and love for the source of the funds.

Honor Your Loved One by Donating to a Favorite Cause

Your loved one may already have donated as part of his or her estate. Even so, sharing your inheritance with a favorite organization or cause can celebrate your loved one’s life and interests. You also may feel like your loved one’s sprit lives on through the work that the cause undertakes.

Time is Your Ally When Determining How to Use an Inheritance

Receiving an inheritance offers a rare opportunity. You gain access to lump sum that you can use to make a big difference in your financial circumstances. For this reason, you want to make a thoughtful, well-researched decision. And that can time, which is fine. And often for the better.

As the financial advisor Katherine Fox cautions, you want to take a long-term view. “Whatever you spend your inheritance on could change your life decades into the future.”

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The Millennial Finance Newsletter: July 24, 2024

For your days ahead: 3 perspectives, 2 articles, and 1 idea from me.

​Three Perspectives

1 / The 10 financial rules of thumb that you don’t have to follow.

2 / The top 10 reasons to contribute to a 529 college savings plan.

3 / The 10 simple financial planning topics that you want to get right.

​Two Articles

1 / “Mom’s money”: how to handle any money you inherit from family members (editor’s note: featured in the above overview)

2 / How much can you safely spend from your investments?

One Idea From Me

I shared an article in a recent e-mail about setting up a Roth IRA for your child in the years ahead. Then, I wrote a brief Roth IRA explainer about what to do when the option becomes available to you. And in the article below, I talk about an underestimated aspect of the opportunity: compounding. It’s so hard for humans to think in exponential terms. But that’s exactly what will power the money that you and your child invest. Take a look:

1 / “When your child eventually makes some money, she’ll likely earn less than $14,600 in a year. That’s the standard tax deduction for a single filer in 2024.

And since this deduction exceeds your child’s income, she won’t owe any federal income taxes that year.

Now, a reminder about Roth IRAs contributions: you usually pay taxes on that money before you invest in the account. But kids who earn less than the standard deduction won’t owe any income taxes.

So they get a much better deal than us adults.”

You can read more in The Power of a Roth IRA For Your Child.

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Your Questions About How to Prepare for an Inheritance

I hope these articles help! Please feel free to send me an e-mail at kevin@illumintfc.com with any follow-up questions. You also can subscribe to my newsletter here to learn more about how you can turn your money into memories with your family. I typically send the newsletter twice each month.

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Recommended Money Reads for Millennials

If you liked this article, you may also want to check out:

• What’s the Right Savings Rate for Millennials?
• Should Millennials Make Extra Mortgage Payments?

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About Kevin Mahoney, CFP®

Hi, I’m Kevin. I’m the founder of Illumint and a financial advisor in Washington, DC. I specialize in financial planning for Millennials like you. As a Millennial father and Certified Financial Planner™, I empower our peers to invest with confidence and flexibility. If you’re new to Illumint, I’m glad you’re here – you now have access to free personal finance tips written specifically for Millennial parents. I encourage you to read, watch, or listen to the ideas I share about exchanging your money for memories with your kids. And then when you’re ready, please send me your thoughts & questions!