Inheritance – The forbidden subject !

Inheritance! Why write an article about inheritance? One of my objectives with the EFILYM blog is to help you be financially independent at some stage. If we talk about financial independence, the idea is to be just that, independent, no?
Even thinking about inheritance when we are on a mission to achieve financial independence would appear completely ironic and incoherent with the values of being “independent”, would it not?

Why talk about inheritance?

It goes without saying that building a plan to achieve financial independence should not be built solely on a foundation that an inheritance will come at some stage. There are many reasons why you shouldn’t rely on an inheritance. The reality, however is that most of us will receive at least one inheritance (whether big or small) during the course of our lives.

There is absolutely no reason why this could not be incorporated to reinforce your lifestyle financial plan. For this reason, the subject needs to treated in as much frankness and transparency as any other money topic. One of the things I appreciate a lot about the financial independence community is the openness and transparency displayed in discussing money topics, and for me, inheritance is no exception.

The 2 reasons for openness and transparency

I’ve no doubt that there would be no shortage of advice on what to do if you suddenly came into money if you received an inheritance. Would all this advice be useful, or even well-meaning? In most cases, I’d not hesitate to say probably not.

Why am I so severe?

Money (especially big sums of money) can influence even the most well-meaning people. It’s important to be able to take a step back and be pragmatic. I’m not saying that you shouldn’t have a bit of a splurge, but I am saying that there are 2 important reasons why an inheritance should be treated with respect and openness where possible.

These reasons are:

1. Inheritances can be (heavily) taxed
2. Respect and responsibility

1: Inheritance taxes

When I moved to France 11 years ago, it was a bit of a shock to me to discover that inheritances could be taxed. In fact, I discovered that there are a number of countries around the world that tax inheritances.  I learned of stories where people receive a property via inheritance (the wish of the deceased was to keep the property in the family), but the person was forced to sell the property, in order to be able to pay the taxes.  The person had not planned in advance for the inheritance and at the point of receiving the property, did not have the appropriate money available to pay the taxes, and ensure that the deceased wishes could be carried out.

Another interesting fact (for at least France anyway) is that the tax rate applied to the inheritance will vary depending on the family link you have to the person leaving you the inheritance. The most extreme tax rate in France is 60% tax on the inheritance for the most distant family link. In fact, there are many rules for calculating the inheritance tax rates, as its quite a complicated subject.

I propose 2 methods to manage these taxes in a proactive manner.

1. Either these associated taxes can be forecasted and prepared for in advance so that when the day comes, there is no financial stress and/or forced actions(having to sell the inheritance) in dealing with the acceptance of the inheritance.
2. Or, depending on the country where you live, there are some actions that can be taken in advance to limit the final tax paid. These actions, however, require to be initiated by the person leaving the estate, while they are alive…… hence my point about being proactive.

Of course, using a mix of these 2 methods is also a good idea.

The best example I have from France is that some properties can be ‘gifted’ in advance, but the right to usage remains with the person owning the estate. This is called usufruct.  By managing the estate properties in this way, the ‘gifted value’, often known as the ‘naked value’ is less than the ‘total value’ (because the value seen in the usufruct can de be deducted from the property value), and hence any taxes are paid on a lesser amount reducing the financial impact of these taxes. I don’t want in any way profess to be an expert on this subject, and if you want to know more about how to manage your personal situation, I suggest you contact your lawyer to discuss in detail. My purpose in writing this article is to bring awareness to the subject so you can act accordingly.

You can agree or not with these taxes, but the reality is that they exist.  I don’t want to give the impression that you should do everything you can to avoid paying your taxes (its good to pay taxes, as they provide many services all around us every day).  I would, however, like to make the point that some proactive and transparent discussion of inheritance could go a long way to ensuring that any deceased’s last wishes are able to be respected. Proactive and pragmatic management of inheritance can also eliminate stress and financial pressure at a later stage.

2: Respect and responsibility

When someone leaves you an inheritance, what the person is giving you is a piece of what they spent their whole life building.  Think about that for a minute.  It’s not just money or property, it represents something, and deserves respect.  

The other important point concerns taking responsibility.  I’ve heard a number of inheritance stories over the years. Often when a parent that passes on, and leaves their, or part of their estate to their children, those children can often be in their 60’s. Normally at that time of life, the ‘child’ has well and truly set up their life and is not really in need of additional financial support (even if some additional money is always welcome). It’s earlier in life where the financial assistance could be more useful.  It could be used to reinforce a plan for financial independence. For example, put in place an emergency fund, pay off debt, or contribute to a downpayment for a first house/apartment, etc.  The type of thing that can make a big difference to someone getting started in life. 

As stated previously in this article, you should not build a plan for financial independence around the possibility of receiving an inheritance at some stage.  If the subject is handled in transparency in a proactive, and responsible manner, however, then it can be a good way to reinforce any plan. Of course, the timing to receive the inheritance can never be estimated with great accuracy, which is again an additional reason why inheritance should only be considered to reinforce a financial independence plan, and never to be the foundation of one. The variation of dates is an element that you could simulate in your financial plan if desired and can be done to confirm that your plan is not dependent on that inheritance. This is what I did in my EFILYM simulations, and it was a powerful exercise in terms of building confidence in our lifestyle change plan.

Real-life

Writing, as I’ve done here, implies that the subject of inheritance is an easy one.  Of course, it’s not. An inheritance is linked to a sad event of someone that we care for and I don’t want to make light of that.  If handled badly, however, an inheritance can bring stress and pain. I’m hoping that this article will help a few of you to look at inheritances in a different way, and perhaps enable you to encourage those open discussions on the ‘forbidden’ subject. I fully encourage you to contact a competent professional to advise and support you in your reflections on any inheritance actions you may take.

I’d love to have your feedback on this article and your point of view and experiences. Please feel free to leave your feedback and stories in the comments section below.

Credit Photo:  Photo by Kristina Flour on Unsplash