Inherited wealth: How to plan wisely and avoid costly impulsive decisions for long-term financial security

Inheriting something need not imply that one must immediately redeem, revise, and rework the wealth. This simple idea seemed very strange, and even more difficult to implement, to a friend who called to talk about it. She had unexpectedly inherited the ancestral home as well as a portfolio of stocks and mutual funds when her unmarried brother passed away unexpectedly. She wanted to sell everything and make plans for the inherited wealth. Why this urge to act?

Quiet ownership does not look like control and power. Many associate investing with frequent buying and selling. Even those with limited knowledge about investing, such as my friend in this case, think they must make decisions about all of it as soon as possible. Here are the rules I wrote down for her.

Paperwork is precious

First, make sure you have understood and completed the processes and paperwork required to get the wealth in your name. To get the stock portfolio and mutual fund holdings transferred in your name, you will need to apply for it along with the death certificate and the legal heir certificates apart from Aadhaar and PAN to establish your rights over them. Each asset—property, insurance, gold in the locker, and investments—has its process and one must complete them.


Second, make a list of what has been inherited and assess the market value. That represents the current total worth of the wealth. Understand how much each of those assets contribute to the total. Know what percentage of the total each asset is. We call this process ‘asset allocation’. Now ask yourself how you intend to use, in the course of your lifetime, each of the assets you now own; and whether that makes sense for your needs.

Third, make a plan for spending the income. For example, renting the house will fetch a default income; the deposit will earn interest; the shares will earn a dividend. Begin with a spending plan for the income if the intention is to enjoy the inheritance. There is no urgency to begin using the capital until you have understood how you are spending and using the newly inherited income. You may wish to upgrade your lifestyle, like to travel, want to spend more on hobbies, and so on. Get used to the money somewhat before making drastic decisions.

Fourth, avoid making grand plans for the wealth in terms of sudden and drastic upgrades. For example, buying a lot of jewellery, or a big bungalow to live in, or a newer and fancier car, and such extravagant expenses will draw attention to your wealth and its attendant problems. You will also find yourself making reckless decisions without the thoughtfulness that may have gone into your money decisions earlier. Research shows that unexpected windfalls create a different level of risk-taking tendencies even amongst the conservative investors. Give yourself time.

Fifth, resist the temptation to make sudden investments, especially in business enterprises and entrepreneurship. Many surprise inheritors and sudden acquirers of wealth lose interest in pursuing their existing or erstwhile careers; instead deciding that they now have enough and thus don’t have to work anymore. Think back to the point we made earlier about income. Make sure that is enough before giving up what you do. Running a business is not easy; nor is wealth alone the requirement to be successful. If you must become an entrepreneur, make sure you understand the business you plan to get in, and don’t invest the last dime on that venture.

Avoid risks you never took

Sixth, beware of risky decision-making arising from newfound wealth. Many recklessly choose crypto currencies, gambling, speculation, and such risky pursuits because they believe they now have deep pockets to take losses. The ability to bear risk is only one part of the story: all these pursuits need skills and capability to cut losses and make ruthless decisions as the tables turn against you. If you don’t have it before your inheritance, you may not have it after, either. Work with the understanding that you don’t want to lose what you have.

Seventh, consider carefully the various demands made by family, friends and relatives on the money you have inherited. It is a free lunch for them. They will see you as a lucky inheritor who has acquired wealth without working for it. They will feel entitled to make demands. Your children will want a share; your relatives and friends will borrow to begin businesses and repay their loans; and you will find every demand being made with entitlement. It helps to keep your inheritance a private matter without disclosing the specifics. Do not try to please everyone. Money never bought love.

Eighth, make a plan for your assets. How much will you use in your lifetime? How will you keep it invested for growth and income? How will you draw out of it? How much will you use every year? What will you leave behind? To whom and how much to each? Make plans for all these, taking your time to think through. Defend your right to make these decisions and do not seek approvals for those who will claim a share of your wealth. It is yours to decide how you will use and leave it.

Don’t lose your right to choose

The primary rule to follow is: do not make rash and immediate decisions. Take ample time to consider what you have inherited and how to use it in a way that enriches your life. The wealth you have gained is yours to use and allocate. Do not let that right slip off your hands. By all means, include your family in your decision-making process. But do not allow them to influence your decisions against your own best interests.

Sudden inheritances can change people— both the inheritors and their hangers-on. Be aware and exercise caution while making big decisions with money.

The Author is Chairperson, Centre for investment education and Learning