What to do with an inheritance – investment advice

June 30th, 2014 by

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Dan Woodruff

Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.
Dan Woodruff

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Inheritance investment advice

We are often asked to provide inheritance investment advice when people receive a large amount of money.

Have you received an inheritance? If so, you need to make important decisions, which may affect your future security. We are often asked about inheritance investment advice. Surprisingly, although an inheritance is a windfall, the sudden wealth this brings can mean that you have some concerns about how to treat this money.

We examine what happened when Derek and Mary received a sizeable inheritance. They wanted to examine how this would help them to live the life they wanted in the future. If you are in this situation you will learn how to approach the problem of your inheritance.

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Key points:

  • How Derek dealt with his mother’s estate
  • The shocking amount of inheritance tax paid
  • How Financial Planning helped them to decide their future direction
  • How Investment Management helped them to manage their new assets
  • Get our free inheritance investment checklist

Derek and Julie’s story

Derek’s mother passed away recently in her early 90s. She had been relatively independent until the last few months of her life. She then needed some care. Since she had assets, the care fees had been covered by her income. Derek and Julie are in the early 60s, and have recently retired on decent civil service pensions. They also have a portfolio of savings and investments worth around £150,000.

Dealing with the estate

After the funeral arrangements were made, Derek had to organise the tax affairs of his mother’s estate. His mother had made a will, and named Derek as one of the executors. This made him responsible to distribute her estate properly and to pay the inheritance tax due.

Derek had to do the following:

Calculate the estate

This represented the total value of the assets held by his mother. Her estate was as follows:

Asset Value
House £650,000
Bank accounts £290,000
National savings £50,000
Portfolio of investments £440,000
Other belongings (jewellery etc.) £75,000
Total £1,505,000

Derek was a little surprised at the size of his mother’s estate, especially since he was her only child. As such he was in line to receive the entirety of his mother’s estate.

Apply for probate

Derek had to apply for the legal authority to distribute the estate of his mother. He was also surprised at just how long the whole process took.

Collect money due and pay outstanding bills

Once Derek had the probate granted, he was able to pay a few remaining and outstanding bills.

Work out and pay inheritance tax due

Derek’s mother had not done anything to prepare for inheritance tax on her death. Her husband had died some years earlier, passing all of his assets to Derek’s mother. As such Derek was able to use both his father’s and his mother’s nil rate band for inheritance tax purposes.

The inheritance tax calculation was as follows:

Total estate £1,505,000
Unused nil rate bands £650,000
Taxable estate £855,000
Inheritance tax at 40% £342,000
Remaining estate after inheritance tax £1,163,000

Derek was shocked at the level of tax that his mother’s estate paid, but there was little to be done after her death.

Distribute the estate to the beneficiaries

As Derek was the sole beneficiary of his mother’s estate, he was to receive the total figure of £1.163 million. Compared to their current situation, this was a life changing amount of money. Derek and Julie spent a long time discussing their various options. Finally, they decided to approach us for advice since they wanted to make the most of this opportunity.

Derek and Julie’s needs

Derek and Julie were relatively comfortable due to their pensions and savings. They had never had this level of assets before, and so were keen to avoid mistakes in dealing with this money.

They were conscious that Derek’s parents had worked for a lifetime to accumulate these assets. This was weighing heavily on Derek in particular since he felt a sense of responsibility towards this money.

They felt that they could use this inheritance to help improve their lives, but were unsure which direction they should take.

Financial planning

We started by helping Derek and Julie to examine their key motivations and goals for the future. This inheritance could give them options for the future. The money was important since it would enable them to take control of their lives, but they were finding it difficult to decide on their future direction.

The Financial Planning process helped them to decide on some goals. There were a number of pursuits they wanted to fund, and a number of things they wanted to avoid in their lives. The inheritance would be able to help them achieve these dreams.

Things they wanted to avoid

Now that they had more money than they needed, they made a conscious decision to stop doing the things they didn’t like doing. This meant using their money to pay for assistance in the areas below:

  • Cleaning
  • Gardening
  • DIY

They had always felt previously that these things were an expensive extravagance.

Things they wanted to do

They then focussed on ways that they could improve their lives now that they had this new-found security. Now that they felt secure, they could work on living their dreams. They came up with the following ideas:

  • Buying a holiday home
  • Buying brand new cars
  • Helping out their 2 children and 3 grandchildren with lump sums
  • Taking up new hobbies – painting and education
  • Spending more time visiting friends and family
  • Spending time working in the community

The Financial Planning process helped them to visualise how these different scenarios would pan out in the future. We showed them how these lifestyle changes could be afforded, and the impact on themselves for the future.

While going through the process they realised that they could afford to help their children financially. It made more sense to see their family enjoying this money now rather than waiting until their death.

“Derek’s parents had worked for a lifetime to accumulate these assets. This was weighing heavily on Derek since he felt a sense of responsibility towards this money.”

Investment Management

After they had spent some of the money on the initial projects, they wanted inheritance investment advice to ensure that the money worked as hard as it could for them in their future. They were keen to retain flexibility, especially with the possibility of future car fees in mind. We worked with them to build a suitable investment strategy to manage the risks they were taking as well as to provide a stable income.

What to do with your inheritance

If you receive an inheritance you might not necessarily need to invest that money. Here are some ideas and suggestions for what to do with an inheritance:

  1. Pay off debts
    If you have any debts, you should consider paying these off with your inheritance. This will free up more money to spend on your current and future lifestyle. You will also save significant amounts of interest.
  2. Build an emergency fund
    We recommend that you put aside at least 3 months worth of household expenditure in an instant access savings account. If you do not have this at present, your inheritance could help.
  3. One-off projects
    Many people use an inheritance to fund a one-off project. This might be the purchase of a new car, building an extension to your home, or even buying a second home.
  4. A better lifestyle

You might use your inheritance to improve your lifestyle in some way. This could include home improvements, holidays or funding your hobbies or education.

  1. Invest for your future

Obviously, we recommend that you use investments to help grow your capital and income for your future lifestyle. If you do not need your inheritance for short term projects, then investing the money seems a sensible solution. Always remember to get inheritance investment advice when you are not experienced in such matters.

  1. Gifts to your family or charity
    An alternative solution if you do not need the inheritance money could be to make gifts to your family or to charity. Through Financial Planning you could examine how much money you need to live the life you want without running out. After you are sure that your future is secure, you could then focus on seeing your inheritance go towards helping to improve the lifestyle of loved ones, or charities.

How to deal with the ‘problem’ of an inheritance

Derek and Julie are quite normal in their reaction to receiving a large inheritance like this. After the initial formalities are completed, it can be quite daunting to work out how to proceed with such a large amount of money. This is especially true if you have never held assets like these in the past.

What this story shows is how you should best approach the ‘problem’ of an inheritance. Ultimately, you need to decide what you want from your life, and then use the money to achieve security and the lifestyle dreams you have.

How to get started

To get started you should download our free guide to How to make the most of your inheritance. Just fill out the box below and we’ll email you this comprehensive guide on how to make the most of your opportunity.

Obviously, Financial Planning and Investment Management can help with this.

See our Sudden Wealth case study.


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2 Responses to “What to do with an inheritance – investment advice”

  1. Quentin Colborn says:

    How did Derek deal with the fact that his mother held more Premium Bonds than she was allowed to under the rules in place at the time?

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