Managing Inherited Wealth

Dream or Nightmare? Money Can Be Both

Tamara had dreamed that one day she’d have wealth.

One day she did, but it came as a nightmare rather than a dream, when a fiery plane crash killed her husband and two of her four children.

For five long years she battled the airline at fault for the crash. Often she came close to abandoning her lawsuit: she had lost so much and the grief was overwhelming. But she persevered, cleaning houses to support her family during the tough times after the accident.

Finally, in 1993 she received a settlement of 2.2 million dollars, a substantial sum of money, but little consolation for what she had been through.

With her sons in their early twenties and married with families of their own, Tamara, then 48, could live comfortably if she managed her money carefully.

The CPA who structured the settlement suggested she come to me to help her invest. Tamara especially wanted to be debt-free, and once we had paid off her home mortgage and huge credit card bills, Tamara believed she could live comfortably on $70,000 a year.

That was twice what she had lived on before, and she was pleased that she would have a comfortable lifestyle and secure future.

I was pleased as well. Seventy thousand dollars a year was only a 3-1/2 % return on the $2 million principal she had available to invest, so we could reinvest some returns to hedge against future inflation.

We selected quality bonds for income and equities for growth within a variable annuity for tax deferral. Each month we transferred $5,800 to Tamara’s checking account, from which she paid her bills.

With the plan in place, and the investments positioned for current income and long-term growth, I thought the rest would be easy.

But within a year, things were not going as planned.

Her investments had performed better than expected, but Tamara had requested additional transfers as her sons needed money.

Down payments for new homes, furniture, cars, and private school tuition all came from mom’s money. Emotions surrounding money are powerful, and with money Tamara tried to replace for her sons that which was irreplaceable. In all, Tamara had spent over $300,000 to support her sons’ new lifestyles.

Soon the spending problem became worse.

Her oldest son stopped working, and he wasn’t paying his mortgage or taxes. With foreclosure looming, Tamara took over those payments too! This had to stop.

I had fulfilled my responsibility to make good investment decisions for Tamara, but she needed more from me. Tamara needed someone to help her say “no.”

We met with her sons and their families, and I backed her up as she explained that they would need to support themselves starting right now.

She still gives her sons and their families love and emotional support, but the financial faucet is turned off.

As a result, her oldest son sold his house and moved to a home he can afford. He is working again, and the entire family is meeting regularly with a psychologist to deal with the buried emotions that surfaced as out-of-control spending.

As for Tamara, she has well over $1,000,000 left. At her current spending level of $70,000 a year, she’ll be just fine. She can live a long and happy life, and ultimately her sons will have a nice inheritance. She’s back on track.

If like Tamara you find yourself in a difficult financial position, here are five tips to gain control:

1. Stop! Reassess your situation to determine what’s going wrong. Don’t beat yourself up about it. Examine the financial facts and start over.

2. Establish realistic goals, and spend only what you have allocated each month. Pay for the necessities first – mortgage, utilities, etc. If you run out of money, stop spending. Do not use credit cards to tide you over until the next month.

3. Bring your advisors into the picture. Ask your accountant, financial planner or investment advisor to help you get your finances back in line.

4. Review your progress on a monthly basis, or even weekly at first. Managing finances is like going on a diet. ongoing improvements count, not the one time fix. Stick with the program, and don’t give up.

5. If your kids’ money problems are creating yours, set limits for them. Let them know you can’t afford to fund their every need. That will be best for them in the long run.

This column by Candace Bahr is based on an actual case.  The names and certain identifying circumstances have been changed to protect the identity of her clients.

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