A few weeks ago, I wrote about talking with your heirs about money at various ages. Last week, I wrote about how to deal with financially irresponsible heirs and ways to protect them from themselves when it comes to inheriting your money. Since then, I have been asked multiple times how big a problem this topic is and whether they should be concerned about it in their specific situation.
So, is squandering an inheritance a big issue for most people? Well, the data absolutely suggests that it is. It is estimated that 80% of all inheritances will be spent in 18 months of receiving them! Now, to start, we should put these statistics into context. The average inheritance in the U.S. is a little over $46,000. The bottom 50% of inheritances average less than $10,000 or, more precisely, $9,200. Meanwhile, the top 1% exceeds $719,000. These past figures, however, don’t reflect what we will expect to see over the next 20 years. The greatest wealth transfer in history started about two years ago and is expected to last for approximately 20 years. As a result, inheritances should rise significantly during this time period.
Generational wealth diminishes by 70% during the second generation and 90% during the third generation. This is how big the problem really is and why I advocate so strongly for folks to take active steps to protect their family’s wealth instead of just hoping that their heirs will “be smart about it.” This is why talking with your heirs about money is important. By setting expectations and really observing the habits of heirs, you can get a better sense of the most logical steps you need to take to distribute your assets to your heirs.
For smaller inheritances where heirs need the money to improve their own financial situation, perhaps an outright inheritance is fine. For larger amounts, particularly those going to less responsible heirs, as mentioned last week, I would suggest a structured payout to ensure the money lasts. This can include trusts, perhaps with incentives or pause periods to stop an immediate spending down of assets. Consider including an ethical will or letter of intent that explains how you intend for the assets to be used.
Lastly, if assets are going to be held in trust, consider using life insurance purchased on all heirs within the trust as a way to use smaller amounts of funds to purchase larger amounts of death benefits in order to replace trust assets, which can help stop or slow the reduction of total trust assets over time. This is a commonly used planning tool for some of the wealthiest families in the world, and it works just as well for smaller estates for the rest of us, too.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS, visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
