A few years ago, a promising NBA basketball player signed a six-year, $60 million contract. Five years later, that same player’s financial situation was so grim that he failed to pay a $570,000 personal loan. Among some of the reasons for his financial hardship were:
- $6,000 for a personal chef
- $30,000 household expenses
- $1,000 for satellite and cable TV
- $17,000 allowance for friends and family
- $350,000 personal loan to a friend
These factors are not unlike those that many beneficiaries face when they attain instant wealth. Many simply have a difficult time handling their newfound wealth because (1) they think the money will last forever, and (2) they have no experience managing large wealth.
Here are a few tips to avoid blowing an inheritance:
- Avoid careless spending. The temptation to buy a new car, new house, or take a lavish vacation with an inheritance is strong. I know of beneficiaries who have purchased a new luxury vehicle (such as a Mercedes or BMW), only to lose it because they barely earned over minimum wage. They failed to realize that insuring, maintaining, and fueling these types of vehicles is costly. Before spending an inheritance on lavish items, take the time to consider the ancillary costs of those purchases.
- Don’t quit your job. It is surprising how many beneficiaries quit their jobs upon hearing that they are entitled to an inheritance. Remember, unless an inheritance is invested such that it provides an income stream, it will run out at some point. Be careful not to jeopardize a nice career on the hope that an inheritance will sustain your desired standard of living.
- Be mindful when giving money away. Like the NBA player above, many people give money away to those they love. Sharing with others isn't necessarily a mistake. However, giving away large sums of money out of guilt or pressure could lead to problems. If you want to give money away, seek the advice of a financial expert who can provide you with responsible giving options that will allow you to maintain your financial strength.
Receiving an inheritance has the potential to change your life. The impact of that change depends largely on how the inheritance is managed. If you are inexperienced in financial matters, educate yourself on money management and seek the advice of qualified financial experts. Employment of a competent tax professional may also be necessary. Finally, an experienced estate planning attorney can provide the advice necessary to pull together all of the considerations of newfound wealth.
Contributed by MH Phoenix Estate Planning Attorney Darren L. Richardson.
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This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.