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Financial Fitness

Understand Your Finances

How to make sure your inheritance is a boon, not a bust

Studies show inheritance rarely builds wealth. Here's how to buck the trend.

In 2011, writer Tamar Fox was left an inheritance after her grandmother died. “I knew it was coming," she recalls. “I had no sense of how much it would be, but I didn't feel comfortable asking or trying to plan more than that."

Fox, 32, ran into a problem that's common in financial planning: Many people don't think about discussing important monetary matters until there's already an emergency, or an emotionally-charged situation, at which point it can feel inappropriate to bring up money.

Fox's situation turned out well. At the time, she was a social worker earning a relatively modest salary. So she used the inheritance money as a down payment on a home. Her story, though, offers an important lesson for millennials who, according to the Center on Wealth and Philanthropy at Boston College, stand to inherit $59 trillion: Discuss sensitive family money matters before an emergency.

“It helps you to not have to deal with financial details when you're deep in your grief," says Jacquette Timmons, a financial behaviorist and author of “Financial Intimacy: How to Create a Healthy Relationship With Your Money and Your Mate."

That may help you make more clear-eyed decisions and hold onto your loved one's gift. While each inheritance will vary, an Ohio State University study found that 35 percent of recipients see no change in their wealth. Even among people who are bequeathed $100,000 or more, one in five spent their entire inheritance.

Here's how to approach the topic and plan ahead so that a time of mourning doesn't also become one of financial stress:

1. Broach the subject before death is on anyone's minds

As Fox discovered, it can feel inappropriate to talk about money when loved ones are already ill. Instead, talk about it when everyone can be more matter-of-fact. They'll also make informed, judicious choices, so the will or trust is less likely to be challenged. If someone's estate is planned when he or she is ill, “The issue there becomes, 'Was the person in any way coerced?'" says Timmons.

If you're a young person trying to start a conversation about money—and specifically estate-planning—with a reluctant family member, explain that doing so is an act of love. “It's a beautiful gift to leave your family with a plan," says Timmons. “Then they don't have to grieve and still be challenged by the financial pieces that weren't taken care of, especially when there was enough time to do it."

2. Begin a series of conversations

This isn't a one-and-done situation. To be fully prepared for everything that will happen upon your parents' or older relatives' deaths, you'll need to engage in a full process.

To start, make sure your parents have wills and trusts. “If they don't have the appropriate estate planning documents in place, and you do inherit a large sum of money, you may have to wait months before you even get it, because that will have to go through probate," says Sophia Bera, a CFP® and founder of Gen Y Planning.

During these conversations, find out who the estate planner is, where the wills are, and who has a copy of the estate planning documents. And, if it makes sense for your family, set up a payable-upon-death or transfer-on-death bank account that passes the assets to another family member. Also, make sure each family member has designated beneficiaries on their retirement accounts and life insurance policies.

3. Get the details

Don't assume you know their wishes. “You might think you're going to inherit all this money," Bera says, “and they might have decided to start a scholarship at their alma mater."

It's a good idea to meet the estate planner with your parents and to know in advance how the estate will be divided among the siblings. “There can be tension later on when you find out the way they are splitting the estate isn't, in your mind, equal to what your siblings are getting, especially when there's property involved," Bera says. If there's a particular family heirloom you really want, or if the family cabin means a lot to you but your brother would prefer cash, say so now. That way, you don't have to untangle who wants what later.

4. Don't make the inheritance your financial plan

“When people think, 'I'm going to get some money,' they tend not to take their own financial situation seriously," Bera says.

Learn how to pay your bills and your debts on your current salary. Another good reason not to factor in your inheritance is that you can't time it. “I'm an only child and there's a chance I'll inherit some money someday, but I hope my parents live to their 90s, so I'll be in my 60s," says Bera. “I better be financially secure way before that. I'm not going to wait until something happens to them to say, 'Now I can retire because my parents passed away.'" Similarly, any inheritance could be eaten up by medical bills by the time it gets to you.

5. Find a financial planner and certified public accountant you like

If you do receive an inheritance, you'll need a good certified public accountant to figure out the tax implications. He or she can tell you whether or not, for instance, it makes sense for your family members to try to gift you money now—up to $14,000 per recipient, per year—to lower or avoid estate taxes. Or whether you should max out your Roth IRA now, because you might be in a higher tax bracket later.

6. If you do receive an inheritance, don't do anything for six months

“This way, you're not making a decision while you're still in the cloud of deep grief, when you might not have as much clarity as you might further down the road," says Timmons, the financial behaviorist and author.

During that time, Bera suggests working with a financial planner to figure out how to spend it in ways that align with your goals and values.

Until then, “There's not a lot you can do until you have the money," says Bera. “The biggest thing is getting your own financial situation in line and making smart financial choices."

For more tips and resources on mastering your finances, visit chase.com/financialfitness.

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