Establishing responsible financial goals after a large inheritance
Client Challenge: How to meet immediate financial goals after receiving a large inheritance while protecting assets for the future.
The KHC Approach
1. Clarify Goals
2. Build a Plan
3. Take action
Receiving an unexpected inheritance can bring on a wide variety of emotions for people. While it is nice to receive the money, people may feel guilty if they didn’t have a good relationship with the deceased, and/or feel grief for the loss. If the inheritance is relatively large, it can change one’s expectations and goals. It can be somewhat daunting to determine how to use the money, as one doesn’t want to waste it.
Martha, a KHC Wealth Management client, was recently divorced and raising two high school-aged children when she received a significant inheritance from a relative’s estate. As she mourned the passing of a beloved family member, she was also grappling with the complicated changes to her personal and financial life. Martha sought help from the KHC team, led by President Matt Starkey, CFP®, to help her through this transition period and make the best use of the inherited money.
Clarifying Goals: Starkey and the team started by working with Martha to understand her values and what was most important to her at this point in her life. They heard from Martha the timing of items that were important to her. Being a single parent, her near term priorities focused on creating a comfortable, stable environment for her kids and to help them get launched into adulthood. This included doing some much needed home renovations, setting aside money for her daughter’s wedding and to fund her son’s vocational training.
She described her other short-term and intermediate goals as:
- New car and some travel
- Boost her charitable giving – for relatives, civic organizations, and her church
- Determine how her inheritance will affect her annual tax return
KHC suggested that Martha take the following further action steps based on her new financial situation:
- Update her estate planning documents (especially in light of her recent divorce)
- Assess insurance needs to make sure Martha is adequately covered
- Review her investments to confirm that they are aligned with her goals and objectives
Martha worked closely with the entire KHC team to prioritize her intentions and then build a plan to accomplish them.
Building the Plan: First, Martha would need to get a handle on her new cash flow situation and expense level. The team built an expense plan that included the tuition costs for her son as well as a fund earmarked for her daughter’s wedding. KHC helped her research the costs of the home repairs she needed, making sure Martha understood how the investment would affect the value of her home. Next, they dug into the details of Martha charitable intentions – which ones would be annual gifts and which ones would be one-time donations. They calculated how much of her income she would tithe. Given her recent divorce, she needed to update her estate planning documents. They also helped Martha partner with a reliable estate planning professional. Martha was concerned about her tax obligations due to the inheritance and the team researched this issue and developed strategies to minimize taxes. Knowing Martha’s goals, her investment portfolio investment strategy was fine-tuned. The financial pieces of her life were starting to fall in place and she began to feel less overwhelmed during such an emotionally difficult period of her life. Martha leaned on the expertise of Starkey and the KHC team to help execute the plan they had built.
Taking Action: To ease Martha’s immediate concern about the state of her home, KHC set up a fund for the renovations. Given the research they had done, Martha felt confident that the investment she made would be recovered when it came time to sell the house. Using the team’s recommendations, she also made sure the changes were properly insured.
With her most pressing needs being addressed, the KHC team moved to her longer term goals and established a charitable giving fund and tithing plan for Martha. She was happy that she is now able to help pay for her grandmother’s care in an assisted-living facility. Martha was also thrilled to be giving to her church. Finally, Martha decided she was willing to take an initial tax hit to get her new assets in line with long-term financial goals and risk tolerance and have a single, comprehensive plan. The KHC team worked with Martha and her estate planning attorney to update the appropriate documents. Martha appreciated KHC’s guiding presence.
Fortunately, Martha has recovered the initial shock and pain that so many of us experience with the death of a loved one. She is taking her time to grieve without the additional worry and confusion of having to sort through complicated financial changes.
Disclaimer: The above does not represent an actual client’s experience but rather is meant to provide an example of the firm’s process and methodology.