Robin walked in the door timidly, clearly feeling out of place meeting with a financial advisor. “I don’t even know where to start”, she said. “I’ve got statements from the inherited account and my tax return from last year, but that’s kind of irrelevant at this point. Won’t I have to pay a lot in taxes from inheriting so much money?”
I assured her that there is no tax on inheritance for the receiver of the money. If the size of the estate of the deceased is over one million dollars, there would have been state taxes in Massachusetts, and over 3.5 million, there is federal estate tax. But that all would have been paid already before she received her money.
Not forgetting that this money came to her due to a death of a relative, I expressed my sympathies for the loss of her grandmother. It is often very confusing emotionally for people to grieve the loss of a family member while at the same time receiving a life-changing very welcome inheritance. It also comes with a lot of responsibility to manage it wisely.
I started out looking over her questionnaire. Ignoring her big money for the time being, I wanted to have a good idea how she dealt with money previous to the inheritance. She was 36 and was working in publishing as a graphic designer making $55,000. She’d been there for 5 years and didn’t expect her income to go much higher. There was no higher position that she might be promoted to and the annual cost of living increases rarely even kept up with inflation. Still, she didn’t know what else to do, so she rolled along with her work as it was.
Robin didn’t contribute to her employer’s retirement plan, a 401(k), partly because she didn’t understand it and partly because she didn’t much extra money after covering her monthly expenses. She did contribute to a Roth IRA most years, often with money that her parents gave her, but she usually added in a couple thousand of her own money. She had been very worried about not having much saved at her age, but at this point she was mostly worried that she might lose her inheritance through careless spending and poor investing.
She didn’t own the apartment she lived in in Brighton, but she did have a 2005 Honda Civic with a loan balance of $2,000. She had $3,000 of credit card debt that she hadn’t been able to pay off in full. Other than the inheritance, she only had $1,500 in cash savings, $22,000 in a Roth IRA, and$10,000 in a 401(k) from an old employer.
“I never look at the Roth IRA or the old 401(k), she told me with embarrassment. ” I don’t know what I’m looking at, anyway. I picked the investments pretty randomly, choosing a few to get some diversification, but I didn’t know what I was doing and I still don’t. I lost a lot in the recent crash, in fact. If I can’t handle that little amount of money, how can I manage my inheritance?”
After talking a little about Robin’s month to month cash flow, we then moved on to looking at the inheritance. It had come to her in the form of two accounts, an IRA and a taxable account. There was $800,000 in the IRA and $350,000 in the taxable account for a total of $1,150,000. This would be enough for Robin to make some real life changes, possibly including her dream of adopting a child. Would it be enough to fund her retirement without additional savings if she continued to spend all her income? Could she buy her own home at this point? There was plenty of planning to do to help her answer these questions.
