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After an inheritance, emotions, finances mingle

Inheriting a sum of money from your parents can be a strange and awful thing. Your parents wanted to leave something to take care of you, to make you happy. But you're miserable. You're dealing with grief and, quite possibly, guilt.

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"There are all kinds of unanticipated emotional problems after a parent dies," says Dan Rottenberg, author of The Inheritors Handbook. " 'I've got all this money but I've lost my mother, do I deserve this?' No matter how well you prepare, there will be problems."

First, do no harm
So, what do you do when you first inherit money? Nothing. Rottenberg advises not making any financial decisions for six months, unless you're desperate. Deal with your grief and don't begin financial planning until you're really ready.

If the money's in a trust, keep it where it is. If your parent had a will, the estate likely will have to go through probate, which means you'll have many months to begin the adjustment process. Give yourself time to separate your emotions from your newly inherited money.

Depending on the size of the estate, you may need to find some advisers. Rottenberg says an inheritance begins to be sizable if it exceeds 5 percent of your gross annual income. If you received just enough to take a dream vacation or pay some bills, then go for it. Beyond that, you may want to consider hiring an accountant, a money manager, a lawyer -- maybe even a therapist.

If you know your parent's financial advisers and you're comfortable with them, feel free to retain them -- otherwise, look for someone else.

"The family adviser may be closer to your parent's age," says Rottenberg. "They might look at you as a child and not take you seriously. You might want to get someone your own age."

You especially might want to hire someone else if you live in a different state than the parent's adviser. Even if you talk to the adviser just once or twice a year, it can be important to have them nearby.

What to look for in advisers
A lot of what you'll look for in advisers is common sense: education, experience, specialties, continuing education programs and memberships in professional organizations.

Rottenberg suggests asking point-blank whether a professional or regulatory governing body has ever cited him or her for disciplinary reasons.

Ask a lot of questions, such as how they plan to add value to the inheritance.

Also ask if your inheritance is too big or small for the adviser. A new adviser you're considering hiring will probably be upfront about this, but if you're sticking with the family adviser it may be an issue. Because of a long relationship with the parents they may be reluctant to say they're not interested. If the trust is too large for them to manage -- or too small -- they may not manage it properly.

And finally, know how the adviser will be compensated. Money managers usually take a percentage, usually on a quarterly basis. Financial planners are sometimes compensated based on what services they sell -- Rottenberg says you want to avoid that.

If you want to manage your inheritance on your own with minimal input from a financial professional, again, allow yourself time to adjust emotionally. During this time, don't make any financial decisions other than making sure the money is earning interest in a fairly conservative investment. If there are taxes owed on the estate, set that money aside.

The stepped-up basis
Certain things that may have been left to you need to be re-evaluated for tax purposes, says certified financial planner Chris Cooper of Toledo, Ohio.

"Stocks, real estate, metals, gems -- can all have a stepped-up cost basis. Retirement plans can't -- they retain their pretax status."

Here's an example of stepped-up cost basis. Your mother left you 100 shares of IBM that she bought at $10 per share. Suppose IBM is now traded at $100 a share -- that represents a capital gain of $9,000. The government allows a new cost basis to be figured for two dates: the date of death and six months after the date of death. You will only pay tax on the amount that it appreciates above the stepped-up cost basis. So if IBM rises to $120 a share and you decide to sell, you'll pay taxes on a $2,000 capital gain rather than on $11,000. You have the option of choosing which stepped-up cost basis date you want to use.

Changes and charities
Spend some time dreaming when you get an inheritance. It's important to set some goals, perhaps work up a budget and explore investment possibilities -- but it's also important to think about some major changes.

"If you inherit the equivalent of several years' salary," says Rottenberg, "you can think about changing careers, retiring early, starting a business, sending the kids to private school, taking a less stressful job or getting involved in charity."

While we're on the subject of charity, beware of people tugging at your sleeve for money. We're not talking about the many excellent, legitimate charities -- by all means, contribute to your favorites. But watch out for the others.

"It was a little frightening to suddenly have all these people making requests of me," says Christopher Mogil, who runs a Web site aimed at exploring the impact of sudden wealth. "I didn't want to be seen as a walking pocketbook, but at the same time I wanted to be genuinely helpful to people."

And last, you should consider reviewing your own estate plan now that your situation has changed. You'll want to be sure whatever wealth you leave behind is distributed according to your wishes.

-- Updated: Jan. 11, 2002





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