I’ll Inherit Big Money Someday. What Do I Change Now?

Reader Liz writes in:

Hi Jesse. We’re a 40-year old couple with two kids, earning about $200K a year, and saving what we can. We both have a parent who ran businesses for years, and we both always knew (based on our upbringings) that our parents likely had amassed considerable wealth.

We recently learned that when my parents pass, we’ll inherit half of (what is currently) $10M. When my husband’s parents pass, we’ll inherit one-third of (what is currently) $12M.

$5M or $4M (or both!) would immediately put us at our FIRE number (about $2.5M). But…we don’t have that money yet, and might not receive it for decades to come.

How do we adjust our financial plan? It’s a good problem to have…

What a fascinating question, Liz! And very much a “good problem to have.”

I’ve heard similar quandaries from clients before, and I suspect we’ll hear this question much more over the coming decades, as the ~67 million Baby Boomers continue to age.

But considering the number of uncertainties about these future inheritances, how do we adjust our financial plans today? Or do we simply carry on as if that inheritance doesn’t even exist?

What Could Possibly Change?

I think the best place to start this answer is by addressing the specific uncertainties surrounding inheritance.

Timing

This is the big one. Liz’s parents could pass away tomorrow…or live another 30 years. The timing clearly affects when she gets access. But it also affects how much the inheritance might grow, and what it will be worth in today’s dollars (due to inflation).

The timing also affects Liz’s own life stage. She might receive it while she’s working and accumulating. She might inherit it when the kids are still at home, or pre-college. Or perhaps not until she’s already retired and empty-nested.

Amount

$10 million today isn’t guaranteed to be $10 million later.

If most of their assets are in investments, the portfolio could rise or fall dramatically.

Liz’s parents may use their wealth for lifestyle, healthcare, long-term care, travel, philanthropy, or helping other family members.

Taxes matter too. Federal estate taxes, potential state estate/inheritance taxes, or income taxes on specific assets (such as IRAs) can reduce the inheritance. Today’s tax laws might change too, altering what Liz is currently assuming.

Medicaid and long-term care laws may affect what’s left for Liz, too.

Structure

How Liz inherits can vary widely. She could get it all at once. It may come in a trust, to be distributed over time or restricted by age, milestones, or the trustee’s discretion.

Family Changes

Families change and so do estate plans. What if Liz’s parents revise their wills or trusts to change amounts, beneficiaries, or conditions?

You may not want to think this way, but there will be situations where divorce, remarriage, or blended families could alter the distribution.

You won’t want to think this way, either, but estate disputes do occur, delaying and/or reducing the remaining inheritance.

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How Should We Incorporate Future Inheritance Into Our Financial Plan?

With these uncertainties in mind, how should we build our financial plan? Here’s what the Certified Financial Planner Board thinks. The basics are:

Hope for the inheritance. Don’t depend on it. Build flexibility into your plan. Treat it as a scenario to revisit, but not a cornerstone to rely on.

I agree with parts and disagree with others. But let’s explain it more, first.

CFP best practices emphasize basing recommendations on reasonable and supportable assumptions. When I think of a “supportable” inheritance, it means:

• There’s legal documentation (like a current estate plan),
• The heirs know the approximate structure and value, and
• It’s expected in a defined timeframe.

If the inheritance is uncertain, the professional best practice is to exclude it from the core financial plan. Instead, you model a “what if” scenario in the background.

I would wager that 99% of the time, the “defined timeframe” is where most heirs lack definition, and why most inheritances end up in the “what if” space. This is a conundrum, though. For many people, the question is not IF, but WHEN. To pretend the inheritance doesn’t exist, or to equate it to $0.00, seems simply absurd.

Planners then usually attempt to build a self-sufficient plan, ignoring the inheritance. If/when the inheritance arrives, it’s icing on the cake.

But there’s another problem. Liz, for example, is staring at a future inheritance that is ~4x larger than her FI number. That’s like 10 pounds of icing on a single cupcake. The “icing on the cake” analogy no longer holds…

That’s why, for larger or more certain inheritances, I would recommend modeling a few versions:

• Base case: No inheritance. Just to set the baseline. Even in situations where you’re damn sure the inheritance is coming, I think a baseline is important.
• Moderate case: The inheritance arrives later than ideal for your plan (which, hopefully, means a loved one is living a long life!), or the inheritance arrives smaller than expected.
• Upside case: The full foretold inheritance arrives sooner than expected.

I would recommend stress-testing each of these three scenarios for retirement readiness (assuming that’s your goal), tax optimization, estate impact, etc. Then, as part of revisiting your financial plan, you revisit your assumptions and rerun these cases.

We also need to plan for actually receiving the inheritance. Sudden wealth can be destabilizing it itself, but doubly so when it coincides with sudden loss. You need to plan ahead for what to do when the money arrives on your balance sheet. For example:

• Set emotional and financial priorities (“What do I want this money to do? What did they want me to do with this money?”)
• Revisit tax implications (step-up in basis, inherited IRAs, etc.)
• Do you now need to make your own estate plan changes?

Ignore an Inheritance? Even a Big One?

I want to revisit my two speed bumps from above.

1. For many people, the question is not IF, but WHEN. To pretend the inheritance doesn’t exist, or to equate it to $0.00, seems simply absurd.
2. For some people, the “icing” of an inheritance is WAY bigger than the “cake” of their own finances.

For these individuals, I believe certain aspects of the “financial planning best practices” are overly restrictive and unrealistic.

If you know you’re receiving an inheritance, you’ve seen the estate documents, your parents (or whoever) have given you a specific dollar amount and informed you how it could potentially change over the coming years, etc. etc., then I think it’s reasonable to build that inheritance (at least a portion of it) directly into your financial plan.

Yes, you’re taking a risk. What if the inheritance doesn’t pan out?

But by assuming the inheritance is $0.00 in your base financial plan, you’re taking a much BIGGER risk! You’re going to scrimp and save and throttle your lifestyle for years in a manner that, ultimately, won’t move the needle for you.

Look at Liz. Her houshold earns $200K per year. I bet Liz could seriously tighten her belt to increase her household savings by $20K to $40K per year. Over the next 10-15 years, assuming average market returns, those savings could easily be another $1M to fund her retirement!

…except that hypothetical $1M would be swamped out by the potential $9M+ her household will (likely) eventually inherit.

The scrimping and saving and belt-tightening will have a measurable adverse effect on Liz’s lifestyle for the next 15 years, but the $1M at the end of the rainbow won’t have a commensurate positive impact.

By assuming no inheritance, Liz risks extreme conservatism and (likely) suffers the consequences.

Now, I’m not saying Liz should go take a $9M mortgage on her dream lake home while assuming the inheritance will eventually help her repay it. I wouldn’t go that far.

But the $0.00 “best practice” does not suit all scenarios. Like much of financial planning, we must combine common sense with reasonable judgment.

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