Planning ahead: Inheritance?

[red92s]

I almost feel like a jerk for considering it, but I suppose it's time to start putting a plan together for the acquisition of inheritance from my grandparents. I'd much rather have a well thought-out plan ready to implement, than be scrambling when the unfortunate event comes.

My grandfather is currently 93. While not getting into specific numbers, my mom has indicated that each blood-related grandchild would be looking at something on the order of $100,000+.

I am currently 24, with a total debt of less than $5,000 (car and CC). I have a 401(k) (~$7000), a traditional IRA (~$1000), a money market account (~$6,000), and some employer stock (~$1000). No school loans, although there may be an upcoming MBA.

I really have no clue where to start with trying to invest a quantity on the scale I stand to receive. Gut instinct tells me to do something that would make it available to assist for a future home purchase, or establishing something to benefit kids (waaay in the future). Any advice much appreciated.

[jIM_Ohio]

put 100k in a money market the day you get it.

spend 10%, save the rest. Keep it in money market until you have a good idea how you want it invested.

[InDebtInDC]

I would strong suggest that you consult with an estate planning attorney, not just for you but for your grandparents and all their heirs, if they're willing.

You need to understand estate taxes, "death taxes", before you lose too much of your wealth.

You may be hit with income taxes as well so you need to structure the transaction to minimize the effect of taxes.


As for how to spend the money, I would say pay off all your debts. Stick as much into 401(k) and Roth/traditional IRA as possible.

As for the remainder of the sum, I would try to look for places to stash them for when you get your MBA loans. Generally you want to look as poor as possible on paper when applying for student loans.

I don't know if you have children or spouses, but you could start some accounts for them like spousal IRA, 529 plan, etc. You can even save for your own education.

You really need a financial planner when you're looking at that much money. A good one is definitely worth the money as they can help maximize your wealth.

That's a good chunk of wealth. Don't blow it. You're given a good boost towards your financial goals. I'd love to get that kind of help.

[red92s]

I would strong suggest that you consult with an estate planning attorney, not just for you but for your grandparents and all their heirs, if they're willing.

I'm fairly certain this was done years ago. They didn't get to the position they were in without some good finance people on their side. This is really just the first time I am thinking about it, but my grandfather has been planning it for years.

That's a good chunk of wealth. Don't blow it. You're given a good boost towards your financial goals. I'd love to get that kind of help.

I don't plan on it. Growing up, I never felt like a "spoiled kid" that got everything. Both my parents work for the federal government, I worked since I was 15 and bought my first car, and got a scholarship for a bulk of college. My parent's felt "obligated" to pay what it an in-state education cost despite my scholarship, which allowed me enough spending money to avoid any school loans.

I'm now realizing that the hard work of my grandparents and parents has given me a massive head-start towards financial security and independence, which I am exceedingly gratefully for . . . so much so that I'd like to insure their generosity can provide the same outlook for any of my (potential) children.

[InDebtInDC]

I'm fairly certain this was done years ago. They didn't get to the position they were in without some good finance people on their side. This is really just the first time I am thinking about it, but my grandfather has been planning it for years.

Laws change every year. Even if a plan were made years ago, you need to refresh it. And even if their side is good, you need to work on your side of the equation to make sure you're eligible for the maximum amount possible.

Then you need a financial planner to minimize your tax liability and maximize earnings in light of your personal goals.

[Ima saver]

I would put the maximum in your roth Ira. Put about 1/2 in a money market fund making about 5% interest(for a future down payment on a home) and invest the rest in a few good vanguard mutual funds, like total stock market and index 500.

[Broken Arrow]

I don't plan on it. Growing up, I never felt like a "spoiled kid" that got everything. Both my parents work for the federal government, I worked since I was 15 and bought my first car, and got a scholarship for a bulk of college. My parent's felt "obligated" to pay what it an in-state education cost despite my scholarship, which allowed me enough spending money to avoid any school loans.

I'm now realizing that the hard work of my grandparents and parents has given me a massive head-start towards financial security and independence, which I am exceedingly gratefully for . . . so much so that I'd like to insure their generosity can provide the same outlook for any of my (potential) children.

Very wise words indeed.

[Caoineag]

Just a note since I am an estate planning paralegal. This may not be as easy as everyone suggests. If your grandparents are smart, they have a bypass trust (better known as generation-skipping living trust) for the grandkids. In that scenario, estate taxes are minimized by leaving the money in the trust and the grandparents get to dictate what you can and cannot do with the money. My suggestion, if it is a trust, make sure you have a little sit down with their lawyer when you inherit since that will help you decide what to do.

[InDebtInDC]

Just a note since I am an estate planning paralegal. This may not be as easy as everyone suggests. If your grandparents are smart, they have a bypass trust (better known as generation-skipping living trust) for the grandkids. In that scenario, estate taxes are minimized by leaving the money in the trust and the grandparents get to dictate what you can and cannot do with the money. My suggestion, if it is a trust, make sure you have a little sit down with their lawyer when you inherit since that will help you decide what to do.

This is exactly why you need legal counsel.

[anonymous_saver]

This is what I would do if I were you when you receive this inheritence (and don't feel bad for thinking ahead, not enough people do):

(1) Pay off CC debt (let's just assume that's $5,000 for now).
(2) Put the full amount into a Roth IRA with a place like Vanguard for the current year (I'll assume it is $5,000 here as well).
(3) Change your 401(k) contribution for that year to $15,500 (or whatever the limit is at the time). Then take out approximately the same amount from the inhertence and just use that as if it was normal income.
(4) Set aside a solid 8 month emergency fund.
(5) Set aside any money left towards a down payment.


By the way, I would probably lower your Money Market account to about a one month emergency fund and using that extra money to pay down that CC. Unless your CC is at 0% or something.

Also, how much are you currently contributing to your 401(k)? Up to it's match?

[red92s]

By the way, I would probably lower your Money Market account to about a one month emergency fund and using that extra money to pay down that CC. Unless your CC is at 0% or something.

Also, how much are you currently contributing to your 401(k)? Up to it's match?

My current CC and car debt is around $5k. The credit card is about 10-15% of that.

My employer matches $1-to-$1 on the first 3%, then $.50-to-$1 on the next 2%. I contribute beyond the employer match amount; my current contribution including the match comes to ~11%. The account balance isn't that high at the moment, as I just graduated and started working 12 months ago.

[anonymous_saver]

My current CC and car debt is around $5k. The credit card is about 10-15% of that.

Then since you have $6,000 in a Money Market account, I would take out 1 months worth of expenses (for example purposes, I'll use $1,200). This would leave you with $4,800. I would use this to pay towards or pay the highest interest debt first (I'm assuming that would be the CC). Then use the remainder of the $4,800 to go towards the other debt (I'm assuming this would be the car). This would take out almost all of your debt! Then with any extra money you have in a month or two I would take out the rest of the debt. Once you are rid of this debt, I would start increasing your emergency fund again. Maybe to a 3 month emergency fund? Then I would start saving more towards additional goals such as a down payment or increasing your retirement contributions, depending on what your goals are.

My employer matches $1-to-$1 on the first 3%, then $.50-to-$1 on the next 2%. I contribute beyond the employer match amount; my current contribution including the match comes to ~11%. The account balance isn't that high at the moment, as I just graduated and started working 12 months ago.

What is your annual income? I would contribute only 5% into your 401(k) to receive the matching contributions, and then putting the max amount into a Roth IRA (if you qualify). If you are able to both of those things, then I would start to increase your 401(k) contributions again. This would help you more because you would be getting both tax advantages.

Your doing great by the way!

[cptacek]

You seem like you have done well so far. I would try to get rid of those debts now, instead of waiting...but I'm sure you will try that anyway. Sure, he is 93, but my great-grandpa died when he was 101 or 102 (no one knew for sure how old he was) so it could be quite a while. So, live your life like the inheritance isn't coming, but having a plan for it when it happens is great. I agree with Jim_Ohio above, about putting it in a high yield account first, because you don't have to immediately jump into something until you are sure about it.

Do you want to own a business? If you do, you could use that inheritance to set yourself up with one. I agree also with using the money to fund a 401(k) and a Roth IRA, but you'll have a lot left after that. Lots of people seem to think that taxable mutual funds were invented by the devil, but they aren't...so don't forget about them vs. just putting the money in a high yield savings account or money market account.

[TBH]

I agree with anonymous_saver that you should kill the debt now. The money that you are used to paying on the debt, you can instead funnel into your emergency fund.

I also like anonymous_saver's plan for the inheritance.

You might want to see if you can buy a modest home before you start school so you'll be building equity throughout.

I have also received a great boost from my family (parents who paid for college, grandparents who are not dead yet but have distributed my inheritance to me already in small chunks during my early 20s). You have a great attitude. In addition to saving most of these windfalls, I have found that setting up a solid plan for making regular charitable contributions has been important for me to avoid feeling guilty about having such a big early advantage.

I personally handle windfalls like this:
25% retirement
25% long term savings
35% short term savings
5% college savings for my kid
10% donations

But I've never received as big a windfall as the one you're talking about so maybe I'd handle it differently.

[robex]

I just had this discussion with my Dad last night! He's planning on leaving the 5 grandkids $50,000 each. I asked him to have it put in trust until they are 30...

You sound like you are looking to spend the money you will inherit in a responsible manner. As our kids range in age from 7 to 13, I have no idea whether or not they will spend their inheritance wisely. I would hope they would, but my bet is only on 3 of them at this point! I think to a 25 year old, with an unexpected $50,000...hmmm...a nice car might sound like a really good idea!

I sure hope that my Dad is around in enjoy each of them hitting their 30th birthdays!