by Baruch Labinsky
Who wouldn’t welcome a gift of cash deposited into their bank account? But the truth is that receiving money is not straight forward when that gift is an inheritance. The ‘gift’ can be mixed with lots of emotional baggage as the recipient struggles with feelings of loss, gratitude and sometimes guilt. Receiving this money as a parting wish leaves the recipient with the added responsibility to make the most of gift. Ironically too many people go through their inheritance within a few years due to either impetuous spending or poor planning. Let’s discuss a healthier approach so that we can avoid this unfortunate outcome.
Obviously, every situation will differ based on the circumstances but the best advice often when receiving an inheritance is to just take your time and think about how you want to use the money. This is especially critical if the estate is settled quickly and you were not expecting the inheritance. Put the money in a safe interest earning account, and let it stay there while you consider the best options. It will provide you with some welcome breathing space that can be critical throughout the process.
Talk to the professionals
Depending on the origin of the money there may be estate taxes (even though there are currently no estate taxes in Israel), or other tax implications that may need to be evaluated. Speak to the various relevant professionals – including a tax advisor, estate planning lawyer and investment professional or financial planner, and hear their opinion of how best to manage your situation. If you either don’t feel comfortable or don’t understand the answers to all your questions, find another professional who ‘speaks your language’. You need to make educated decisions regarding what to do with your money, so you must ensure you understand all the ramifications.
Pay off debts?
High on the list of things to consider is paying off outstanding debt. Debt can create terrible long term financial consequences, especially if you are paying high interest rates or collapsing under the weight of high monthly payments. However, not all debt is the same. A long-term mortgage at a low interest rate should not necessarily be repaid (even if you have the money), especially if you are approaching the end of the mortgage term, where you already have paid most of the interest due. Often it makes sense to keep cheap debt like this and invest your savings in ways that you can earn higher rates of returns than you are paying on your mortgage debt, especially with today’s historically low rates. Investing your savings gives you more financial flexibility to build wealth and invest in your future.
Other debt, like bank or credit card debt, with high interest rates, do not have those advantages. Proceeds from an inheritance therefore are often used to pay back debt, reduce your interest expense, and help you to start saving.
Set up an emergency fund
An emergency fund usually contains three to six months’ worth of living expenses saved in a separate account to be used for emergencies that aren’t covered within your budget. With this emergency fund in place, unexpected circumstances will not have the power to derail your financial plan, helping you remain able to achieve your financial goals. Having just lived through a year of corona, where many people lost their income completely or had it reduced, the significance of an emergency fund has become even more important.
Investing for your future
Investing is normally a critical element of everyone’s long term financial plan. There are few of us who can afford not to be investing for their future needs, whether they include retirement goals, medium-term large purchases like replacing your car, or even saving for short-term yearly objectives like vacations. We can usually only afford to save a certain amount of our earnings and must rely on our money earning money for us (or at minimum not losing purchasing power in the face of inflation) by investing at various levels of risk and growth potential. Receiving an inheritance allows us to jump start our investment plan and make up for lost time by investing a larger sum of available capital, which can help us tremendously with achieving long term financial stability. You will need to work out your risk profile and long and short-term investment goals which can vary greatly depending on your stage in life and personal inclination. If you are too busy or feel unprepared to make those decisions unguided, consult a professional. Your investment plan will need to be reassessed regularly to ensure that it continues to meet your requirements.
Before you spend that unexpected gift or inheritance, ensure that you’ve considered the big picture of your finances and what role this capital needs to play in your plan. Naturally, different people react differently to a sudden injection of cash. There is nothing wrong in designating money towards your dreams. You must, however, ensure that both your dreams and your basic subsistence in the long run, for both you and your family (however you define that), are being considered.
Your inheritance to others
Although many people are uncomfortable thinking about their death, it is crucial that everyone ensures that their own estate is in order. Writing a Willand ensuring that it is halachically compliant can save your family tremendous strife as dying intestate (without a Will) leaves survivors without any clarity and the default secular or religious laws can be very unsatisfactory. If the whole situation makes you uncomfortable, realize that leaving your mess for the next generation to sort out can be disastrous. I hope that thought will motivate you to move out of your comfort zone to ensure your affairs are properly organized. You can then safely forget about the subject in the hope that it won’t be relevant for many, many decades, but secure in the knowledge that your financially responsible acts now will help your loved ones further down the line.
The Chronicle of Philanthropy did a study years ago where they asked people who received an inheritance, ‘what amount of money they would need to feel totally secure financially’. Regardless of how much they received, every single one of them gave a figure that was approximately double what they had inherited. The lesson here is that rather than hankering after a mythical sum that you won’t receive, utilize what you have in the best way possible.
An inheritance is a big deal, irrespective of the actual size of the gift. It is often accompanied by the emotional element that connects the recipient to the departed, and the responsibility that it brings. Be very careful that no decision about spending the money is made without looking at the whole financial picture. Everyone can maximize their inheritance – it just takes foresight and planning.
Baruch Labinsky is the founder of Labinsky Financial, specialists in budgeting, retirement planning, investment management and pre- and post-Aliyah financial planning. Licensed by the Israel Securities Authority as a portfolio manager, Baruch specializes in working with olim who are looking to grow their wealth successfully, and is the author of the olim’s ‘bible’ “A Financial Guide to Aliyah and Life in Israel”. Contact us on 02 9910029 or email firstname.lastname@example.org.
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