The idea of getting a large inheritance sounds great but the reality of sudden wealth can be very stressful. In fact, some people are often much better off not receiving a large sum of money. There’s even a term called Sudden Wealth Syndrome that recognizes the guilt, stress, impact on relationships and self-destructive behavior that can sometimes occur. Professional athletes and lottery winners often end up in worse shape financially, even in bankruptcy, within a few years of receiving a large sum of money that they aren’t equipped to manage.
Last year the Survey of Consumer Finances reported that the typical (median) inheritance was about $69,000, an amount that most Americans can handle without much trouble. But some beneficiaries may suddenly receive millions and it can lead to serious sudden wealth problems. Someone that hasn’t been taught how to handle a large windfall may not feel worthy of the money and destructive behaviors like gambling or drug abuse are not uncommon. Others may find that friends and family suddenly appear with financial requests and scammers will often show up with shady investment schemes.
If you plan to leave a large inheritance to your children or other beneficiaries, it’s best to think through how the size of the inheritance will impact their life. Even a $100,000 inheritance can be too much for someone that has led a paycheck-to-paycheck existence. With a little education and counseling ahead of time, they may be better equipped to know how to manage it when the time comes.
Another way for benefactors to handle their legacies is by establishing a trust that would be managed by someone other than the beneficiary. This third party, another family member or trust company, can fulfill directions left in the trust document to provide a regular income to the beneficiary and for specific expenses like health care or education costs. This can allow the beneficiary to gradually adapt to a better and sustainable lifestyle without the risk of mismanaging the entire inheritance.
At Vintage we’ve seen the negative impacts of “trust fund” kids as well as other inheritors that blow through a small fortune in just a few years only to end up broke. We do our best to educate the beneficiaries, but some people just aren’t equipped to handle the funds even with good advice.
Another option to distributing your legacy is to make regular gifts while you are still living in order to see how well your beneficiaries can handle the funds. Of course, some advice and suggestions on how to handle it can be worth as much as the money.
You may want to determine an amount that your beneficiaries can handle and, if your estate exceeds that level, leave the remainder to charities. We’ve seen family foundations established where the children receive a reasonable inheritance but are also able to direct distributions from the foundation to worthy charitable organizations for years to come. This can keep siblings in touch and fulfill the wishes of the grantor long after they are gone.
At Vintage we’re happy to help you maximize the size of your legacy and also the positive impact it can have. Reach out today to get started.