Tuesday, April 22, 2008

How NOT to Handle an Inheritance

After four years, she's finally done it. She's spent her entire inheritance.

Let me explain. I work at a financial services firm. A client of ours, let's call her Eunice, managed her finances well and left an inheritance of about $272,000 to her two children when she passed away four years ago. Both children were in their 40's and each received $136,000 when Eunice died. Both children also immediately began taking distributions from their inheritance.

The son started spending his inheritance money like it was going out of style. He passed away about a year after Eunice died. His wife received the inheritance and hasn't spent a dime more of it. She's saving it for her own retirement (very smart woman!).

Eunice's daughter, let's call her Jane, also began spending her inheritance immediately upon receiving it. About once a month, Jane calls us and says that she needs $2,000 (it varies every time she called, but probably averages out to monthly and $2,000 each time).

Jane also declares each time she calls that she needs the money "as soon as possible" for some bill or another that's due in 4 days. Because she needs the money so quickly, we have to wire it to her (costing her an extra $15 wire fee each time), and the process starts all over again in about a month. Jane never would agree to an automatic monthly withdrawal, which would have saved her the $15 wire fees.

Some of the inheritance money was in an IRA, so Jane has also had to pay taxes and early withdrawal penalties to the government on her withdrawals.

Well, Jane made her last withdrawal last week, just under four years after her first withdrawal. She's managed to blow through about $136,000 in four years, which averages out to $34,000 per year. Since Jane makes about $40,000 per year in her career, she has almost doubled her spending each of these past 4 years. And now it is gone. I have no idea how she plans on continuing her spendy lifestyle with the extra money.

Every time Jane has called "needing" more money over these last four years, I've wanted to grab her by the shoulders and shake her. Didn't she realize that if she kept the money untouched, she'd have a really nice addition to her (probably nonexistent) retirement funds ($633,000 at age 65 with an 8% return)? Didn't she ever think that Eunice would be rolling over in her grave if she knew how fast her daughter went through Eunice's life savings?

I was actually glad when Jane called last week to take that last distribution (wired to her, of course). I'll no longer feel that frustration every month at her poor management skills, knowing what "might have been".

I don't know what the message in this post is, besides encouraging people to think about the future and not be idiots ;)

Do you know people like this, people whom you want to scream at for their stupid money decisions? I'd love to hear about them!


Terry Sherman said...

True, but the guy who spent it like it was going out of style and died a year later... He can't take it with him, and he left some around as well... I suppose it depends on if he knew he only had a year to go...

Mrs. Micah said...

The more I read and write about personal finance, the more I get frustrated with people who make such bad decisions. Mediocre decisions are so much better...even if she'd put half away, that would have been comparatively great!

When it comes to windfalls, I'm of the mind that if you want to spend it, you should put aside a certain amount to spend and put the rest away where you can't touch it. It can be harder to go without completely than to set it up to force moderation (though apparently an IRA penalty didn't matter to her).

L@SpillingBuckets said...

I agree with Mrs. Micah, the more I read and understand PF the more I get frustrated with other people's poor decisions, especially with my friends and people I care about.

Leah said...

Terry, I couldn't agree with you more. You cannot take it with you when you pass, so have fun! Perhaps this woman needed the funds for lets say, medical bills or something. I think too many times we are quick to judge when we don't know the entire story.

Becky@FamilyandFinances said...

I won't go into the details, but the money was not spent responsibly.

Funny about Money said...

Doesn't this kind of thing seem to run in families? I know several people who, despite disaster after disaster, just can NOT learn to handle money responsibly. They recognize they have big problems (especially when the repo man breaks into the garage and drives the car away), but they don't seem to have the psychological resources to organize themselves and get their spending under control.

In all three cases I know of, at least one parent also behaved that way.

Maybe it's in the genes. ;-)

Becky@FamilyandFinances said...

Parents do seem to pass these things on to their kids. Maybe the two kids in my story got it from their dad since their mom was obviously good with her finances!

Kacie said...

Yikes! That's so unfortunate. If she made better financial decisions, she could still spend her inheritance, but she could have made it last a lot longer!

Becky@FamilyandFinances said...