When is an inheritance not an inheritance?

When is an inheritance not an inheritance?

An inheritance isn’t always an inheritance – especially when it’s just a fairytale.  In fact, inheritances can sometimes be a bit tricky.  Let me explain.

So, how do we deal with inheritances for our clients? 

I’m not talking here about money that they’re going to give away when they die, I’m talking about money that they may inherit from other people.

But, do you include it as part of their assets?  Do you exclude it?  What if you exclude it and it turns out it would have made a big difference if you’d included it?  What if you include it, but it turns out that they don’t get it?  What to do…..?

There are 4 scenarios that you will come across, but only 2 of them need a little extra work.

Scenario 1 – your client isn’t going to get an inheritance

This one’s dead easy.  Your client has no inheritances whatsoever.  They might be an only child, no other family, it’s just not going to happen.  Brilliant.  Nice and easy – you don’t need to include that on the board.

Scenario 2 – your client 100% knows they’ll get an inheritance

This one’s pretty easy too –  your client’s 100% certain they’ll get an inheritance.  It’s perhaps in a trust, it’s guaranteed, the capital is secure and maybe someone else has a life interest in it but they will definitely get the inheritance – and they know the rough time scale when they’ll get it.  Brilliant.  You can use that because you’ve got sight of the documentation that shows you it’s a certainty.  So, get it on the board.

This leaves 2 other types.

Scenario 3 – the client that doesn’t want to talk about it

This one is surprisingly common.  I mean, who wants to talk about people dying?  And usually it’s their parents that they are due to inherit from.  They don’t want their parents dying, do they?  And you certainly don’t want to be seen to be coveting their money whilst they are alive – it’s just not very nice.  The fact is, some of your clients might be very reluctant to talk about potential inheritances.

So, what do you do?  The temptation is to ignore it rather than making them feel uncomfortable.  But you can’t.  The reality is, if it’s more than likely they are going to get a chunk of money at a certain point in time, we must include it.  Why? Although it’s not coming for several years, it could make a difference now, because we have tools that can tell us that – called cash flow modelling.

The trick is to de-emotionalise it.  Remove that thought that they are wishing someone dead in order to get their money.  So instead we say, “let’s assume that the person you’ll inherit from lives to 100.  We’ll work out the dates.  We’ll only assume that you get the inheritance when they reach 100.

Most people are more than happy with that – they are no longer wishing them dead but are, in fact, celebrating them having a long life.  You’ve changed the whole emotional narrative.  It’s now about them living a really long time – wouldn’t it be fantastic if they lived until they were 100?  And yes, I’ll gladly take whatever money they leave me if they live to 100, that’s a trade I’m prepared to take if it ensures them a long life.

But for you and your cash flow model, the fact that it’s there means that it can free up money now, safe in the knowledge that the money is more than likely to come – further down the line.  If you like, you can be even more cautious and say, “well, let’s assume that you only get half” because we need to think about care fees and things like that.  Taking them to an age of 100 is a great technique.

And that now leaves us with the last scenario.

Scenario 4 – the fairytale client

This client is literally living a fairytale.  They will say, “yep, I’m definitely getting an inheritance.  I think it’ll be about £1,000,000 and I’ll probably get it when I’m 35.”

So you start asking them some questions, like where it’s coming from, and they say “it’s coming from my father. And he’s promised me that the house is all mine.”  So you probe a bit further and ask when he promised this, and your client replies, “I think it was when I got married.  Actually, he’d had a few beers and said he was going to make sure I was okay.”  And that’s it!  But in their head, they’ve built an absolute cast iron, guaranteed inheritance.

Truth is, it was probably just a drunken comment and the reality is, this might be 20 years ago – the father’s probably sold the house, bought another and when you check on Right Move, it’s only worth £500,000.  The Land Registry then tells you it’s got a mortgage on it, and the father has remarried and has 4 other step children.

What are the chances of that person getting that inheritance?  Pretty much non-existent.  But if you’d just taken them at their word and slapped it on their Lifestyle Financial Plan, what sort of unholy mess is that going to be when the father dies and they find out they aren’t getting anything?

The plan then doesn’t work.  And your client has spent half of their life waiting for an inheritance to come – trust me, I’ve seen it.  It just creates one big mess.

And do you know what?  The father’s off the hook, but guess who’s going to get the blame?


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