Episode 515 – Will You Inherit Family Money: Part 2

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John Walker
Hey, welcome to the Your Life Your Wealth podcast. I’m John Walker, Regional Vice President at Mercer Advisors. Always a pleasure to be with you. And as promised, we’re going to pick up where we left off in a previous episode talking about, you know, what to do and what you need to know if you stand to benefit from an inheritance. And previously, we focused a little bit on, you know, the actual brass tax mechanics of it, like the things you need to identify and think about, the tax consequences.

But today we’re going to focus a little bit more on the behavioral aspect of it, what, what impact it can have, and both as the recipient and as the grantor of, of this type of gift, what you should be mindful of and the impact it potentially could have, right? Some of the do’s and don’ts of the emotional and behavioral impact of what inheriting assets can do to your family. And to help me have that conversation.

My good friend and colleague here, CERTIFIED FINANCIAL PLANNER® and market leader Mr. Jason O’Meara. Jay, thanks for joining me again.

Jason O’Meara
Yeah, of course, great to be back and continue this conversation.

John Walker
Yeah, and I think, you know, we kind of left it and we focused the last conversation we had in this space around sort of like, you know, the tax impact and the titling of things and what you need to understand and the differences between inheriting a traditional IRA and a Roth IRA, and that’s, and that those are really, really important considerations, right? But much like everything in financial planning.

There’s the math and there’s the rules, and then there’s the purpose, the strategy, the consequences, the real life impact of it, right? The intersection of your life and wealth. And so I thought today we’d spend a little time just talking about, you know, the impact that an inheritance can have on a family, and we could talk a little bit about, you know, certainly.

The what you should do as the person who might be planning their legacy, but we can all, I think also talk about you as, you know, someone who might receive an inheritance, the, the impact that has because it candidly, whether it’s big or small.

It can have and create amazing opportunities for families, but it also has the potential to lead to real emotional and financial turmoil, right? It’s, it’s, it can really go either way, and we’ve both in our careers probably have countless stories of both the positives, right, of the wonderful things that it’s done for families.

And some of the unintended consequences of, of some of these, you know, inheritance stories. So, so, I mean.

Jason O’Meara
You know, yeah, we hear these things all the time of just situations where people either weren’t prepared or kind of given things in the wrong way, and, and yeah, there’s lasting impact to it, and it may unwind any good planning that you may have already done by, by not thinking some of these aspects through. So I agree it’s a very important topic.

John Walker
Yeah, and, and, and, you know, as we, we noted in our last conversation, right, there, there is an expectation that over the next 2025 years there is going to be one of the largest wealth transfers in history taking place, right? I mean, I’ve seen estimates as high recently as $124 trillion is going to exchange hands before. It’s a lot of money, right? And it’s a lot of people and it’s just, you know, a product of an aging demographic and, and one that has seen tremendous, you know, certainly in the United States, tremendous growth in market returns and, and, you know, there’s, there is this expectation or anticipation of a potential windfall and as we said, there’s, there’s a lot of good data out there and

There is an understanding that many, many folks feel completely unprepared to manage even small amounts of money, let alone substantial windfalls, right? And so, so, you know, what good planning addresses is does this potential financial windfall create freedom for the generation that you’re granting it to, or does it become handcuffs or a huge financial flop, right? And what can you do to prepare for that?

Jason O’Meara
Exactly. And, and part of that, you know, in preparing for that is, I mean, I’m, I work with now that we’re not hoping for the inheritance anytime soon, but we are preparing for it, right? So what’s going to happen? What you don’t want to have like anything, right? If you’re going to build a house, you don’t pour the foundation and then figure out what you’re going to do, right? You know what I mean? You plot everything out in advance, and this is no different. Yes, it’s a little bit more morbid.

Yes, it involves mom and dad dying, but in the event that that happens, you have to look at it and say, OK, am I prepared for this? Uh, what are, what are our goals? How is this going to help us get to our goals, right? Is it retirement? Is this gonna allow us to send the kids to college or, or whatever that might be, right? But understanding, you know, if, if, if you are somebody who isn’t the strongest with money and controlling your impulses and controlling your spending, this might be a real test.

You know, if, if, if you can’t, if you can’t handle, you know, receiving a few $100,000 and not immediately going out and spending it on anything you could, all the things you wanted that you haven’t been able to afford, uh, over the last 10 years, right, that could be a real test, right? Cause nobody, when they’re in like leaving a legacy, John, you and I both have kids, you know, the thought of me leaving my kids money, like a couple million dollars in life insurance proceeds. Terrifies me because if they’re young, oh my God, they’re gonna blow through that money.

John Walker
Yeah, yeah, and, and what have, what have you done to educate and train them and unfortunately, right, that, that doesn’t always happen, whether it’s through, you know, for a plethora of reasons. Some families don’t feel comfortable about it. The basic money management skills that certain people have may not always get passed down generationally because it’s difficult, right?

And, and it’s also if you are a child who grew up without need, right? If you, if your parents were successful or financially successful at least and had had means, you may not have developed some of these skills. I mean, we see it all the time, right? Anecdotally, I’m sure there’s good research on this as well, but you know, it doesn’t mean that just because your parents were good at it, you are going to be good at it. My dad’s, my dad’s a carpenter. He’s incredibly good with his hands. I am less so, right? And so, so, so, so, you know, it happens, right? But I can do things that he can’t. That is the natural order of things, right?

And so if financial literacy wasn’t taught to the next generation, right? That that windfall can quickly turn into squandered opportunity, right? And so one of the things, you know, we like to encourage families to do, Jason, is if you are going to be passing assets to children, perhaps consider putting some guardrails in place if you’re concerned about what could happen, right?

You know, if you want to instill values, you can actually do it with good, you know, legal planning, right? With good estate planning, you can actually give instruction as to how the assets can be spent, what they can be used for. Put some guardrails in place, put some protections in place. Yeah, exactly. Even if your children aren’t bad with money, it doesn’t mean this is a bad idea,

Jason O’Meara
Right? It still makes sense, right? I mean, I, we, we, we’ve had many conversations off air where we talked about, you know, the lessons we’re teaching our kids. Now my kids are really young, so those lessons are very basic. Your kids are, you know, uh, approaching college, yeah, so, you know, those lessons are, you, you, you’re giving a little bit more real world lessons around that. But the reality of it comes down to if, if a 17-year-old gets a couple million dollars free and clear, you, that, that may be a deterrent from them going to college, they may think they’re on easy street the rest of their life, right?

So, you know, and doesn’t mean you have to go to college, but my point is they may not get the job that they should get to support themselves, right? But if you were to put them in a trust where that money is earmarked, uh, you know, for education, health, to make sure you know health maintenance and support, right? The, the quote, the quote is HEMSs, right? Health, education, maintenance, and support. And those are the things that your trustee can give them money for, right?

They, they get sick, they go to go to doctors. Here you go, pay for that. If you know they need books for school, pay for college, go pay for that, right? But you, not being around, are still able to kind of teach from beyond the grave, if you will, and help and help facilitate those years where we all know your brain’s not fully developed until you’re 25, right?

So you know, the 17 year old’s not thinking long term. So you know, put those, put those guardrails in there, right? But also you can put, you can say, hey, they can’t get the money until they’re 35, you know, free and clear, or pieces of it become theirs over time. But you know you’re protecting them from things like divorce. It’s not a marital asset. You’re protecting them from lawsuits, you know, if they get sued and that money’s still in the trust, they can’t access it. Therefore, neither can the lawsuit.

So you’re kind of protecting them, in ways that may make them feel like, oh, mom and dad didn’t trust me, but if you lay this out appropriately and explain it appropriately, they should be able to see the wisdom in it. Well,

John Walker
Well and I think that’s a really critical point you’re making there, right? Not only does it allow you to create a framework that can preserve this family’s wealth, insulate it from, you know, loss, litigious action, protect them from themselves legally from some, some actions, a divorce, keep things lineal and in the family. It also enables a conversation that we often help families have, right, which is, listen, once you’ve mapped this out.

Much like financial literacy, some families have a hard time passing on the lessons that they’ve learned, but a good partner can actually help facilitate that conversation. I mean, Jason, I’ve been there, we’ve run them together facilitating family meetings of like, hey, listen, you know, when you’re ready, Mom and Dad, let’s bring the kids to the table collectively and we will help. We will help navigate this, you know, somewhat complex tricky conversation that might have some emotional baggage because I think that’s the thing that’s often missed in this process, you know, many families, you know, there, there is emotional baggage that comes with an inheritance that complicates the gift, right, and maybe getting ahead of that and communicating to your children, hey, this is what is going to happen next.

Here’s what you’re going to do, because they’re already going to be grieving, right? So to have transparency and, and, and real clarity on what the steps are going to be and the why, that’s the thing that’s often left unsaid and that makes it really emotionally damaging for some families, like why did this go this way or why did, why did mom and dad leave this to me this way or I had no idea, right? That’s the other big one, right? If, if, whether big or small, it could be an opportunity, as we said, an inheritance, no matter the size, could be an opportunity. It could be seed money for a new business. It could pay off debt to get you, you know, established and help you get on your feet more quickly. It could fund an education. It could do so many things potentially, and it could also be an albatross, right? It could also be something that is really complicated or conflicted for the recipient.

Jason O’Meara
But at the same time we do spend a lot of time focused on the ways that could go wrong. But let’s talk about some of the good that could come out of this, right? Sure. I mean, being able to set up as a parent, and I’m not going to speak for every parent, but my job, my goal is to set my kids up to have a better, easier life than I had. Now I didn’t have a hard life, don’t get me wrong, but I want my kids to have it better.

Setting up an inheritance does that, right? It sets up that ability for them to maybe Find themselves, right? And not in the way that some people feel like, oh, the hippie dippy find yourself sort of thing, right? But maybe let my kid take a chance on a business that otherwise she wouldn’t have been able to.

Maybe let them go to that college and maybe it’s out of state that otherwise she wouldn’t be able to, you know, um, the idea that it can also Build in this ability to create general, generational wealth. Um, you know, generational wealth only happens when both, all the generations are working towards it, right? So, you know, me leaving money to my kids, letting them, them take a chance and maybe setting up something better for themselves.

And then have that money then passed to the next generation. It’s, it’s pure legacy at that point, you know. Nothing better than being able to say, hey, that person you’re related to that you never met because they were dead before you were born has impacted you in a positive manner, and, you know, pay that forward, you know, it’s a way that, it’s a, it’s a way for, you know, your family to kind of take over the world, if you will.

John Walker
And Jason, you’re right, right? It could be such a gift of possibility, but it’s rarely that neat, right? We talked about this. It’s pie in the sky. It often comes with some conflicted emotions, right? You might be grieving. You might be distant from that parent, or perhaps we see this a lot. Some folks have a hard time spending the money because they still see it as their parents. They still see it as mom and dad, right? It’s not theirs, and they, they fear dishonoring their memory, they worry about selling a particular stock because there’s an emotional connection to it, right?

And so even though it was intended to support your children’s future, they’re not ready to make changes or use it for how you intended it, right, because there is, there is, you know, you know, it can be really, really challenging, right? And so I mean that’s common, right? We see that all the time where it’s just you know, hey, what do we wanna do, like, oh, this is great, this money helps you get to your goal, but it, it’s, like you said, it’s very difficult for them to be able to let go of that.

Anchoring, it’s anchored to their parents, right? And oh, I can’t pay this. I can’t do this because Mom and Dad would have wanted me to do X, whatever it might be, and it’s really difficult to break free of that when, you know, I can sit there myself and say, no, Mom and Dad wanted the best for you. Mom and Dad wanted you to be able to live your life, and this is going to help you do that.

Jason O’Meara
But I can say that until I’m blue in the face. If, if that change doesn’t come from inside and don’t realize, yes, that’s what mom and dad wanted me to do, and this is how I’m gonna honor mom and dad by living the best life I can. It’s very difficult to get them to move, you know.

John Walker
And again, sometimes it’s not possible, but having these conversations in advance, right, helping to understand, you know, that if mom and dad expressed to you like, hey, this is set up for you to use in this form or fashion, like when we’re gone, that’s what it’s for, or setting them up in advance or helping us helping those families navigate what are the emotions behind those money habits, right? Why do mom and dad behave a certain way and how do you get an opportunity to either continue that legacy if that’s what’s intended or pivot, right?

Like, you know, mom and dad may have saved a lot of money and, and, you know, we see this, unfortunately as well, right? They were really frugal and hard workers, and diligent savers. And many children are completely unaware of what mom and dad have set up for them, and that also creates really conflicted emotions, right? Hey, we never, we, we were never allowed to spend money on anything, you know, treats and stuff, and now, now you’re handing me a million dollars, right?

Jason O’Meara
You know, I’ll give you a really good example of that. I had this, in the past, in the past, uh, one of my past firms I worked with where the same thing happened, where Mom passed away. We brought in both daughters and said, Hey, here’s what, here’s what’s in the accounts. This is what you’re inheriting. One was visibly angry, and the other one just couldn’t stop laughing. Uh, but, and we, but I was kind of surprised by this.

John Walker
And so very, very, yeah, disparate emotions, right? One’s, one’s, yeah, cracking up, the other one’s…

Jason O’Meara
And I asked like, hey, so I was like, All right, look, I can tell you’re very upset by this. What, what are you feeling? Why, why, why is that? What’s going on here,] right? And she said we weren’t allowed to go to proms. We weren’t allowed to do all this stuff growing up because we were told we didn’t have the money, and now you’re handing me, it wasn’t like $1 million and this was like 15 years ago. This was, you’re handing me like each of us $5 million several, several million dollars, right, and it was, they were like we missed out on stuff in our life because Mom said we couldn’t afford it, and here she was just hoarding the money, right? And so, you know, that’s a, that’s one where, you know, there’s a negative emotion tied to that money at that point.

John Walker: Right? And it’s due to a lack of communication and a lack of, of knowledge, right? Yeah, there was no because you didn’t know, you know, and you know, hindsight being 20/20, but, but getting ahead of that and saying like, hey, listen. Like we scrimped and saved all your lives, and it was challenging and we didn’t have it at the time, but we were able to stack, stack this away for you and we want, you know, we want you to have it now or maybe some, or maybe some work along the way to say hey, you know, maybe there were some gifting opportunities that could have happened and some other things or, or, you know, far be it for me to, to, to place, you know, my values on it, but, but understanding that.

John Walker
That surprise that maybe was intended for mom and dad to be this tremendous, you know, blessing and surprise at the end of their lives actually in this case created resentment, right? It created anger, created, had the complete unintended opposite effect. And so again, we, we could probably sit here for hours telling stories of all the crazy things we’ve seen in decades of doing this, but I think the takeaway is

[19:39] John Walker: You know, you really need, if possible, it’s really, really helpful to have these conversations ahead of time and even if you need help doing it, and most importantly, get this stuff documented, right? Get it, get it mapped out, whether it’s in a will or a trust or a family note.

Like it is really important that you take the opportunity to help those people who are going to receive this understand what you wanted, right? And so if you are the recipient of this type of gift or an inheritance, there’s a couple of things, Jason, I think that we’d be remiss to not remind people. The first thing is, take a deep breath. Like, don’t be impulsive.

Jason O’Meara
Don’t let the dust settle.

John Walker
Yeah, hit pause, right? You know, before you act, take a moment to consider what the heck does this mean? And if that means doing a thorough review of your finances, look at everything.

Talk to a professional, you know, don’t do crazy things like quit your job or drastically change your life, right? Like if you get a big pot of money, don’t go buy a yacht or like a, a beach house, right, without, you know…

Jason O’Meara
Let’s wait. Let’s, let’s do some planning,

John Walker
…a deep breath and do some planning. And honestly, I, there’s no, you know, there’s no rush to do anything with it, right? Work with a professional, get your arms around how you feel about it. Get your arms around how it impacts your plan, particularly if it was unexpected, right?

And so, and if there is an opportunity to do so plan ahead if you know this is coming, right? If you know or can at least have a, an inkling that there’s going to be some sum of money coming to you. Think about how that can change things, but I want to underscore what you said at the very beginning. Plan for it, not happening. Plan to build a plan that is successful without it.

John Walker
And then look at that as something that can only enhance what you’ve already done, right? Build for retirement and build for all these things with your own strategies, and then if something like this comes, see how it can alter that trajectory, right? Exactly.

Jason O’Meara
It’s all gravy at that point. If you’re successful on your own and you’re and then you inherit money, then boom, you’re even better. Yeah, you know…

John Walker
That’s exactly right. Exactly right. Jason O’Meara, CERTIFIED FINANCIAL PLANNER® and market leader here at Mercer Advisors, thanks so much for helping me have this really important conversation and one, I think we are having more and more, and we will continue to have more and more as this great wealth transfer, yeah, and as this big great wealth transfer really gets into full swing here, I think it’s going to be something that’s going to be really, really important that people focus on. So thanks so much. Appreciate your time.

Jason O’Meara
Yeah, of course, thanks for having me back.

John Walker
And so if you have questions about what Jason and I talked about, if this is something that’s happening in your family, if it’s a dynamic that you’re struggling to manage, we’re always here to help. Give us a call anytime at 215-558-3500. That’s 215-558-3500, or you can email me at jwalker@merceradvisors.com. That’s jwalker@merceradvisors.com. I’m John Walker, Regional Vice President at Mercer Advisors. Thanks so much for listening to the Your Life Your Wealth podcast. See you next time.

If you’re interested in learning more about applying the principles we discussed to your personal financial circumstances, please visit Cordasco Financial Network at CFNplan.com.