Inheritance will invariably be preceded by other poignant events such as bereavement and a probate process. Your solicitor will provide guidance in probate and some will find it helpful to engage professional assistance in dealing with bereavement. Ultimately when the proceeds of an inheritance are received you will be faced with making decisions on what to do with them.
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Below we have looked at varying aspects of dealing with inherited wealth. To view our other inheritance planning resources click here.
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For further information on inheritance tax planning, inheritance tax calculators and the varying exemptions and reliefs available, please feel free to download a copy of our Inheritance planning guide.
Inheritance decisions
Whilst every individual and their circumstances differ, most people who receive a lump sum inheritance will have similar thoughts and questions regarding how best to put their inheritance to use. Priorities, and what is appropriate will varying depending on individual circumstances however, your options are generally divided into four broad headings:
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· Debt reduction – such as a paying down home mortgage
· Consumption – buying a new car or home improvements
· Giving – such as assisting a child in buying a home
· Investing – how best to allocate or re-allocate your inherited assets
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We deal with each if these headings individually below, though, more often than not the overlying question is how best to allocate between these competing priorities. Finding an appropriate balance and what that will mean for your future is something we have competence in modelling and for our clients. Ultimately there is seldom one right answer to financial planning matters, simply a spectrum of different choices and implications. As financial planners, it is our priority to assist you in making informed decisions.
Debt reduction
What is an appropriate level of debt for an individual or household to carry is a function of circumstance. Key considerations items to consider are the age and income of the individual concerned, their health, nature of their work, family circumstances and plans and desires for the future.
Household debt has considerably reduced in Ireland over the last decade, however, for most their largest monthly outgoing is still their mortgage. Hence debt and most particularly reducing or eliminating mortgage debt is a key consideration on receiving an inheritance.
Paying household debt should be a key consideration in allocating inherited assets. Whilst debt reduction and ensuring debt is appropriately profiled should be an integral part of any financial planning exercise, debt reduction should not always be treated as a sole or primary objective in allocating assets. Instead it should be considered as a broader, if highly important part of your financial planning mix.
Consumption
What to spend the money on is perhaps the most alluring part of receiving a lump sum amount, however it is also the most fraught from a planning perspective and the one that potentially has the greatest impact on long term outcomes. This said, making an allocation to changing an aging car or carrying out home improvements is a legitimate planning goal. Ultimately finical planning is about assisting you in making reasonable decisions about how to allocate your money and ultimately allocating money is about how accommodating immediate and deferred consumption. Money is something that must facilitate living as opposed to being an ends in its own right.
As financial planners it is our job to help you understand the impact of allocating your money to consumption now or at a later date.
Giving
For many, giving is a high priority. This may be for such things as to assist a child in buying a first home or supporting a cause dear to ones heart. Whilst not a priority for all giving is a certainly legitimate consideration in allocating inherited wealth.
As financial planners, we can assist you in understanding the impact of your decisions to give. We look at not only the implications on your own situation such as considering how giving may impact what you have available to provide for your retirement, but also how amounts you wish to pass may be structured to ensure efficient transfer ensuring your generosity has the desired outcome.
Investing
This is a broad heading covering how you retain inheritance not allocated to debt reduction, consumption or giving. This may include decisions on how best to utilise assets received as part of your inheritance or how you choose to allocate or re-allocate them. Items from cash deposits to properties, existing share portfolios, investment bonds, art or any other number of diverse items may come into play. The key is to make sure that your inherited assets and deployed in a manner such as to best suite your circumstances as opposed to simply remaining a legacy of the past.
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Investment success relies on process and methodology, avoiding commonly made mistakes and understanding of risks inherent in the investment solution employed. A recent Canadian academic study showed those taking financial advice ending up with 173% of the wealth of those who did not after 15 years. Much of this benefit was derived from increase understanding of investment and the avoidance of detrimental behaviours and decision making.
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From assessing risk, modelling future outcomes, considering asset allocation, taxation and structure, we work with each client individually in developing a solution appropriate to their future needs and wants. Investment is not about finding the next big thing, but rather about employing sound methodology process to deliver appropriate outcomes.
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At SMP Financial we have considerable experience in assisting our clients in dealing with inheritances large and small. By helping our clients in understanding the implications of their decisions, building financial models, assisting in investment manager selection or simply acting as a sounding board we provide assistance in optimising outcomes. If we can assist you please contact us through the form below