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How to Manage an Inheritance




By James E. Stowers.

Even if you are able to provide your survivors with the cash they will need, is this all you need to do?

In the case of death, either spouse may be faced with difficult financial decisions. For the purposes of illustration, the following example assumes that the wife has been widowed. Besides taking care of the funeral arrangements, taxes, doctor bills, calming herself and reassuring the family, your widow will be contacted by a representative of one of your insurance companies. Actually, she doesn’t want to talk to anyone, but the financial situation demands it.

The agent tells your widow how much insurance you provided for her. He asks her what she wants to do with the money. Not being sure what to do, she asks the agent for advice. The agent suggests an insurance annuity that would pay her a definite sum each month for the rest of her life. “The money will never run out,” the agent says, and encourages her to do this. Because she is upset and does not want to make any major financial decisions quickly, she tells the agent she wants to think about it. At this point, she is not certain what she should do. She is anxious and confused.

Next, she might seek advice from close friends. They might explain that an insurance annuity is not the answer because it does not protect her against future inflation. They tell her there will be no way to obtain additional cash in case of an emergency. Instead of an insurance annuity, they recommend that she take all the money from the insurance company and deposit it in several different savings and loan associations. They feel she will earn more money from her investment that way. She listens to what they say, but is still undecided.

Perhaps your family doctor calls on your widow. During the conversation, she tells your doctor about her financial problems and asks advice. The doctor advises her to invest in mutual funds and let professionals manage the money.

This sounds logical but she is not ready to make financial decisions, and she continues to seek advice.

An enterprising broker reads of your death and contacts your widow. Again, she solicits advice. The broker suggests she take the money in cash and permit him to invest it, indicating that her problems will then be solved. She will have no more decisions to make; they will be made for her. But she still has questions.

While discussing the settlement of your estate with her attorney, your widow reveals her problem. The attorney suggests that she create a trust and allow a bank trust department to administer it for her.

No wonder your widow is confused. Everyone she has talked with has given her different advice. She feels that some of her advisers are looking out for their own best interests. She realizes that this might be the largest lump sum of money she will ever receive, and she is afraid of making the wrong decision and losing money. Because she remains confused, she does nothing. She tells the insurance company to pay the money to her in cash. She deposits the money in her checking account and then waits, hoping that somehow a decision will be made for her.

Several years later, your widow confides in a close friend: “I am worried about my money. I am not sure what to do. I wish my husband and I had discussed this while he was still alive.”

Is providing enough money for your survivors all you should do? Of course not. Why not discuss your opinions with your spouse and make a plan together while you both are still alive?

Before you agree on a plan, why not first consider the challenges of money management? There are two fundamental issues:

 Spending Money Wisely

 Making Money With Money

Spending Money Wisely

Most people spend money wisely, trying to get their money’s worth. If you fall into this category, you do not have a problem. If you believe there may be a problem, perhaps you can control the amount of money that will be available to spend by your survivor by using a trust instrument or an insurance annuity.

Trust Instrument

If you are worried about your survivor’s ability to manage the spending of money, or if you want to limit the amount of money that can be spent, you can have your attorney establish a trust instrument now. In this legal document, you can give a trustee the power to control the spending of the assets. The trustee can be an individual or the trust department of a bank. If a trust is used, your survivor will usually be given a fixed amount of money to spend but can ask for more in a financial crisis. The trustee will charge a fee for this non-investment management service.

It should be pointed out that it is unlikely that a trustee will be willing to perform this service only. The trustee will most likely ask to be given the right to make investment decisions as well and charge an additional fee.

Advantage of having a trustee: Impartial control of spending

Disadvantages of using a trustee: Your survivor may be at the mercy of the trustee even as a co-trustee in the document. If additional money is needed, your survivor must try to convince the trustee. If additional funds are needed for anything, your survivor must, in a sense, “beg” for the money. (This could be avoided if the trust allowed discretionary withdrawals.)You may think that the fee required by the trustee for this service is not reasonable. You’re probably right.

Insurance Annuity

Another way to control the spending of money would be to have your survivor buy an insurance annuity. The annuity is a contract issued by a life insurance company that guarantees a specific monthly payment for life.

Advantages of an insurance annuity: Your survivor will receive a fixed income each month for life. Your survivor will not need to be worried about money management.

Disadvantages of an insurance annuity: The annuity does not provide for protection against any loss in the value of a dollar. No extra cash is available. If there were an emergency requiring extra cash, the money could not be obtained from the insurance company. An insurance annuity is expensive. It takes a great deal of cash to provide a guaranteed monthly payment for life. If your survivor dies early, the value of the estate will be reduced.

Making Money with Money

The biggest challenge of money management is how to make money with money. To make money with money, many decisions must be made. Someone must decide where to put the money to work, how much should be put in any one place, and when the money should be taken out and placed somewhere else. And those decisions must be made continually.

Let’s examine just three choices concerning who can make these money management decisions:

Your Survivor

A Trust Department

A Fully-Managed Mutual Fund

Your Survivor Can Make Decisions: Your survivor can listen to the suggestions of others, read financial periodicals, then take chances with individual security investments. As with anyone making financial decisions, investment success will be a function of education, experience in money matters, and ability to make the correct decisions. You need to consider the potential anxiety level associated with this choice.

A Trust Department: If your survivor is not confident about making investment decisions, your survivor can go to a bank trust department for money management. For a fee, the trustee will perform this service. For additional fees, a trust department will perform other services.

Advantages of having a trust department make investment decisions:

Offers professional experience in money management.

Removes the responsibility of money management from your survivor’s shoulders.

Makes investment decisions according to your instructions.

Detailed record keeping is provided.

Disadvantages of using a trust department to manage money: Generally, a trust department can offer only part-time investment management. For example, let’s assume a trust department has 500 individual trust accounts. Let’s also assume that there are 10 trust officers to manage these accounts. If the accounts were divided equally, each of the officers would have 50 accounts. If a trust officer spends equal time on each of his 50 accounts during a year, each account will receive the equivalent of only five working days of personal investment management a year. Actually, the time may not be divided this way. The larger accounts will undoubtedly command more time and the smaller accounts will receive less time.

The quality of a trust department’s work depends on several factors: first, upon the ability of the particular investment adviser, and second, upon how much time the trust officer spends with your survivor’s trust account. No matter how intelligent the trust officer, the quality of work cannot be good unless adequate time is spent on the account.

The investment management given by a trust department is generally overly conservative. With the fear of continued erosion in the value of a dollar, this conservative stance could adversely affect long-term investment results.

The past investment record of individual trusts of a trust department is not generally available to the public.

A Fully-Managed Mutual Fund : If your survivor does not want to make the individual investment decisions, the money can be managed by a fully-managed mutual fund. This type of fund is one in which the investment manager is given the broadest authority possible at all times to use his best judgment in managing the fund’s assets as to:

What to invest in.

How much to invest in a particular security.

How long to remain invested.

How much cash should be held if more attractive investments cannot be found.

  • Advantages of having a fully-managed mutual fund:
    A fund provides full-time rather than part-time management.
    More investment management is received for each dollar paid.
    No matter if your account is big or small, all investors get the same
    attention from the fund’s management.
    All the manager’s time is spent taking care of one portfolio of securities.
    More time is spent making investment decisions, so there is greater
    opportunity for better results.
    Detailed record keeping is provided.

The performance record is public and the results are audited.

Disadvantages of a fully-managed mutual fund: Most of these funds invest only in marketable securities. Because of this, closely held companies and personal real estate investments cannot be used since they are not marketable. No individual investment advice is given since the mutual fund is managed for all fund investors. Investment decisions cannot be made according to your instructions.

“ Test Drive” Your Financial Plan

If you believe that the trust department of a bank is the best place for your survivor’s money to be managed after you are gone, tell your survivor now. If the trust department is good enough for your survivor, why isn’t it also good enough for you? Why not give the bank’s trust department a chance to manage your money today? See what the bank can do with it and at what cost. If you are not satisfied now, why should your survivor be satisfied later?

If you decide mutual funds can best serve your family’s financial needs, discuss it with your loved one now. Tomorrow may be too late.

Try investing some of your money in selected mutual funds. See what the results are. Find out what other services are offered. See if you are satisfied with what mutual funds can do for you now. Your family will benefit in the future from the experiences you gain today.


Excerpted from Yes. You Can… Achieve Financial Independence by James E. Stowers. Copyright © 2004 by Stowers Innovations, Inc. All rights reserved. Excerpted by arrangement with Morningstar Communications Company. $24.95. Available in local bookstores or click here.

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