I recently inherited a significant amount of money,
but I don’t know what to do with it. I want to ensure that I am doing the right things with the bequest. How do I take control over my finances? Where do I start?
 

I just came into a large inheritance. Now what?

When a loved one dies, it’s already an emotional time, and receiving an unexpected windfall only complicates things. An inheritance can completely change your lifestyle or at least bolster your financial outlook, but only if you make sound decisions. The most important thing to keep in mind when dealing with an inheritance is to create a plan for its use. Because of the emotional circumstances surrounding your inheritance, it may be best to wait before making any decisions so you have time to process your thoughts and develop a coherent plan. As a family CFO, Ferris Capital can act as the quarterback of this plan. We’ve encountered many different situations, and unique issues in our combines decades of experience that can serve your own inheritance issues.

Make a Plan
Take all the time you need in order to formulate a plan for your inheritance. In the meantime, you can keep the money in a high-yield savings account, CD or money market account, as long as it is safe and liquid. This waiting period will help you clear your head and avoid making rash spending decisions.

To make your plan, you should first get a clear picture of your current financial situation. How much debt do you have and what are the interest rates? Do you have an adequate emergency fund and insurance? Are you saving enough for retirement? Do you have enough money to pay your monthly expenses? Once you answer these questions, you can identify weak areas and allocate inheritance money there. While making your plan, keep in mind that your goals shouldn’t change after an inheritance; rather, you should use the money to reach the goals you already had.

Pay down debts.
High-interest debts should be your first priority, because the money you pay in interest can never be recovered. Credit cards, consumer loans and car loans are all examples of “bad debt” that you should prioritize over lower-interest debts, such as your mortgage or student loans. If you decide to put extra money toward mortgage payments, make sure you’re not losing the mortgage interest tax advantage.

Add to an emergency fund.
You should have a savings account with money readily available for emergencies such as unexpected car repairs, health expenses or job loss. Most experts agree that you should save between three and six months of expenses. You should keep your emergency fund in a safe and liquid account so you can easily access it in an emergency.

Invest it.
If you determine that your odds of living comfortably in retirement are low, use the inheritance to fund your retirement account, choosing the appropriate risk level for your age and tolerance. Ferris Capital can aid in determining your proper risk profile, and ultimately investing the inheritance in a well-diversified basket of investments with goals ranging from income and capital preservation, to aggressive growth.

Other.
If your finances are already in good shape, there are many other ways you can use your inheritance. First, you can use a portion of it as fun money without feeling guilty. You may also consider donating it to a cause your benefactor would have supported, or spending it in another way that keeps his or her legacy alive. Another worthy use of an inheritance is saving for your child’s or grandchild’s college fund, or even going back to school yourself.

Things to Consider
• Your inheritance might come with tax implications, so make sure that is factored into your overall plan to avoid unpleasant tax surprises.

• If your inheritance significantly increases your estate, you may need to create or tweak your estate plan.

• Certain inheritances, such as expensive jewelry, come with added insurance needs.

• Beware of lifestyle inflation, because you may get used to an inflated lifestyle, run out of money and be forced to give up comforts you’ve come to expect.

• If you’ve inherited an IRA from your spouse, you can roll it into your own. But if it’s not from your spouse, you’ll be required to make a minimum distribution each year, for which you should create a plan. If it’s a Roth IRA, you won’t have to pay taxes on distributions.

• Oftentimes, heirs make irrational decisions because they consider the money to be “found money,” and thus less important than earned money. Having a smart plan for your inheritance will help you treat it rationally.

Should I pay off my current debt?

For many people, debt is a necessary evil, or even something to avoid at all costs. But debt is actually not a black and white issue. Not all debt is bad, but not all debt is good either. In order to avoid financial ruin and maximize your money’s potential, it’s important to know the difference between good and bad debt, how much debt you should have and how to make debt work to your advantage.

Bad Debt
Paying interest on an item that depreciates in value over time is the definition of bad debt. Most credit card debt, especially when used to purchase clothing, electronics or other everyday items, is bad debt. Using this definition, a car loan is also an example of bad debt. Your car loses value as soon as you drive it off the lot, yet you’ll be paying interest on the loan you took out for years. Going into debt for vacations, food or other consumables is a bad use of your money because you’ll be paying interest long after the purchase has been consumed.

Good Debt
Student loans, business loans and mortgages are generally considered to be good debt. That’s not to say you are in bad shape if you don’t have these debts, but rather, it’s not a bad financial move to take out a loan for educational expenses or a home if you can’t afford to pay cash. What makes these purchases different? They all have the ability to increase your wealth over time. You’re taking on debt to invest in something and potentially make more money in the long run.

A student loan is an investment in yourself; the idea is that you’ll have better job prospects with a college degree, which will allow you to not only repay your loans and interest, but also continue earning more throughout your life. Similarly, a business loan allows you to create a new way of earning money—assuming your business is successful, you’ll be able to pay off your loans and still continue to build wealth. It takes money to earn money, so a loan may be the only way you can afford to start a business. A home mortgage gives you a place to live and the opportunity to build equity when you most likely couldn’t afford it on your own. Real estate generally increases in value over time, so mortgages are also seen as good investments for the future.

Leverage
Leveraging your debt—borrowing at a low interest rate and investing at a higher rate of return—is also good debt. The most common occurrence is investing in a home through the use of a mortgage. But there are other ways to make your money work harder using debt.

When you take on a loan, you owe a certain percentage of interest on that loan. Similarly, when you invest in the stock market, you get a percentage of interest added to your investment, depending on how well the market does. If the percentage of interest you earn is greater than the percentage you pay, you’re successfully leveraging your debt. When done correctly, leveraging can be extremely effective at building wealth. This type of investing can have much higher returns than regular investing, but it also carries higher risk—if your investment doesn’t pan out, you not only lost the amount you invested, but you also owe interest on your loan. Leveraging also doesn’t work if your interest rate is too high or your rate of return is too low. Investing when you have credit card debt is a bad idea, because no investment can guarantee a return higher than your credit card interest rate. It’s also a bad idea to borrow money just to have it sit in a low-interest savings account—the interest you’re paying must be lower than what you’re earning on the investment, or you’re not successfully leveraging your debt.

How Much Debt Should You Have?
If you have too much debt, lenders may be less willing to extend further credit to you, and you risk not being able to pay it all back. If you don’t have enough debt, your money might not be working as hard as it could be. There’s no scientific way to quantify exactly how much debt each individual should have. Many experts agree that your monthly debt payments should not exceed 36 percent of your monthly gross income. This ratio will change depending on your living expenses, lifestyle and personal feelings about debt. There are three factors to consider when deciding how much debt you can comfortably take on:

• Your assets: savings, investments and your overall liquidity
• Your job security and potential for income growth
• Your discretionary income—what’s left over after you pay all necessary monthly expenses
• You can use several ratios when determining how much debt is appropriate. You can compare your monthly debt payments to your monthly income, your combined debts to your assets, your housing expenses to your monthly income or your monthly consumer credit payment to your monthly income, among other ratios. Advisors will recommend various ratios as ideal—your housing expenses shouldn’t exceed 28 percent of your income, and your monthly credit card payments shouldn’t exceed 20 percent—but it’s important to take your own unique situation into account.

It’s important to understand that debt is not all good or all bad. If you acquire the right kind of debt, in the right amount, and use your credit cards wisely, you can become more financially successful than you would have without the use of debt.

Ferris Capital helps clients define their current debt obligations, and evaluate in detail whether or not taking on new debt is a sensible action. Many of our clients even call us for advice from the sales office of a luxury car dealer to determine whether it makes more sense to finance or pay cash. The answer is different in every situation depending on the client, but our firm is there to serve as a true family CFO, and be there for clients to help determine the answer to these kinds of questions.

What are the essential concepts and steps of trust & estate planning?

While the thought of having a personal “estate” may conjure images of Vanderbilts, Rockefellers and the other wealthy elite, an estate is probably the most common thing for a person to have. By definition, an estate is simply the property under an individual’s name. It can include everything from a home or business, to bank accounts and retirement funds.

Taking steps to plan for the future of your estate can be one of the most important things you do. In fact, dividing and bequeathing your property is the very last official action you make. To ensure that loved ones can make the most of what you are able to leave them, it is important that you learn the different parts of estate planning and consider how they might affect you.

How much planning is enough? That depends on the goals you want to reach. Using a variety of methods, there is no limit to the amount of control you can put on your estate. And while not every estate requires every method of planning, it can be helpful to know the steps of planning available to you.

Benefits to Beneficiaries
The first and easiest step to planning an estate is establishing beneficiaries of private funds or policies, like life insurance policies, 401k plans and pensions.

This is the easiest step in estate planning because it is typically requested by most plans that a primary and secondary beneficiary be listed to receive funds in the event of a death. Though some plans, like life insurance, will require the beneficiary at signup, others may make it optional to do later. People often put off establishing beneficiaries, creating problems if they die suddenly. Whenever an option to name beneficiaries is offered, it should be handled immediately.

Wills The next major step in estate planning is establishing a last will and testament. While a person who dies without a will (dying “intestate”) still has his or her property divided up among family, there are no guarantees over who gets what. A will is a simple way to make sure specific items get to the people who ought to have them.

If children are involved, a will becomes a necessity for a responsible parent. Wills determine who gets legal guardianship over the surviving children. Though a court will take this process seriously if the decision is left up to them, it is far better for the parents to designate the people they would like to raise their children. A will stating guardianship should be top priority for anyone with children.

Though useful for declaring who should receive property, wills do not automatically guarantee another person can receive it. If property is owned jointly with a right of survivorship or is kept as “community property” between a married couple, ownership may be transferred before a will goes into effect. Though most state’s marital property is not treated this way, individuals should be aware of their state’s marital property laws prior to creating a will.

Handing Over Power
Potentially as difficult as a death, the medical incapacitation of an individual can cause huge amounts of stress for a family. Living wills give instructions for the medical care of an individual given they are in an incapacitated, terminal condition. Though limited to these specific situations, living wills can spare a surviving family from difficult decisions and prevent conflict between members who have different views on treatment.

A more in-depth approach to prepare for sudden incapacitation is the creation of “power of attorney,” a document that gives a named individual the ability to act on behalf of the disabled in legal matters. Drafted for both medical and financial decision making, power of attorney documents can be extremely difficult to detail and should only be created by a legal professional.

Trusts
Though many people think trusts are financial bodies that are only meant for the wealthy, the truth is they can be used by most people to create detailed control over an estate. A trust is simply a legal entity that holds property for the benefit of a few named individuals.

Though the major advantages of a trust are deferring probate fees and having circumstantial control over property distribution, trusts are also useful for couples who have children from prior marriages. In a trust, a person can place property that would pay interest to help support the surviving spouse, but ultimately distributes property to his or her children, guaranteeing they receive some of the inheritance.

Gifting
Individuals looking to reduce their estate before death should consider simply giving money away to loved ones later on in life. Each year, a person can give up to $14,000 tax-free to each unique individual or institution they choose. As long as the gifts stay below this amount, they will remain tax-free and still not count against the lifetime gift tax exemption. There are no transfer taxes on gifts made to public charities, regardless of size.

Securing Estate Documents
After necessary estate documents are prepared, they should be adequately stored and protected. Wills are the most difficult to protect. Most states recognize only the original signed document as having any legal power. If the original is destroyed, a new will must be drafted. Typically, the law firm where the document was created will offer to keep the will in an extremely secure safe.

Other documents, such as living wills and power of attorney, can typically be copied and notarized to create duplicates that carry the same legal power as the original. As with wills, loved ones should be informed of the documents’ location so they can be accessed when needed.


Estate planning can be a difficult process for people. The concept of preparing property for an accident or death is hardly something people want to spend time considering. Though its creator will never see it used, a well-written, well-conceived estate plan can make all the difference for friends and family.

Who Owns What?
An important aspect of estate planning is determining the state of ownership of all property associated with the estate. Wills and probate only deal with the property officially belonging to the testator. Joint-ownership of property through marriage or another arrangement keeps property out of probate because it is already owned by another person.

Joint-ownership, marital property or “life tenant” policies combine the ownership of property so that a surviving partner gains full control after a death. It is important to know the details of ownership because it affects how property is handled after a death.

Filing for joint ownership seems like a great method to bypass probate and probate costs, but it comes with inherent risks. People added to a joint ownership have as much legal control of the property as the original owner. Bank accounts can be accessed and emptied by either party, causing problems if the money was relied on for future plans. Similarly, property that is jointly owned often cannot be sold or altered without permission of both owners. Because of these risks, joint-ownership titles should only be sought if both parties have similar plans for the future and trust each other implicitly.

Death and Taxes
While people make efforts to avoid probate costs and court fees for the estates they leave behind, taxation is a much more encompassing process. Probate only handles property that needs to be distributed by a will or intestate laws. Taxation looks at all property that an individual held at death and shortly beforehand. The taxable estate includes all property (owned outright and joint-owned), investments, recent donations, trusts and life insurance policies. While much of an estate can be declared either tax deferred or tax exempt if passed on to a spouse or charitable donations, estate and gift taxes on inheritances can be extremely high. Local estate taxes can vary greatly from state to state. Research and legal advice should be sought to protect against any unexpected estate taxes.

Simplifying the Future
Many people avoid estate planning because of the inconvenience of cost and the uncomfortable concept of their death. The simple fact is that death or serious accidents cannot be controlled; however, if the proper steps are taken, almost everything legally associated with an unfortunate event can be organized. A plan and proper legal arrangements keep unnecessary fees, taxes and court battles from plaguing a family after the death of a loved one.

Ferris Capital can help craft or review the plans you have laid down for the future and what else you can do to ensure property moves seamlessly between the survivors of a death in your family.

Get in touch with our experts


 Matthew Elsenbeck

Matthew Elsenbeck

 Andrew Vernazza

Andrew Vernazza


 
 

The Ferris Capital Process


We firmly believe that the best results come from a consistent process with a thoughtful design.

We use low cost ETFs, mutual funds, individual bonds, and stocks to build custom portfolios for our clients that are in line with their larger financial plan. We always seek to use the lowest fee, most efficient investment vehicles possible and to utilize best of class managers when they offer more value than an index or ETF.

Understand Your Goals and Financial Situation 

Ferris Capital meets with you to fully understand your goals, time horizon, anticipated cash flows, and feelings towards investments in general . We also conduct an in-depth evaluation of your total financial picture including insurance, wills, trusts, 
and employee benefit options.

Create a Financial Plan Tailored to Your Goals

Ferris Capital works with you to develop a comprehensive financial plan that positions you with the highest probability of success in meeting your goals. The plan includes goal-driven asset allocations, tax sensitivity, long-term estate planning, and overall 
risk management.

Establish the Proper Accounts and Legal Structures

If applicable, Ferris Capital can direct you to top notch accountants and attorneys or work with your existing relationships to formulate and execute the structures and strategies to best protect your assets from taxes and liability. 

Current Investment Evaluation and Tax Analysis 

We analyze your current holdings to see if there are any embedded taxable gains or additional issues that should be considered in building your portfolio. If there are any issues, we will construct the investment portfolio to address those issues specifically and potentially use the existing investment as proxies to our investment model choices. 

Portfolio Construction

Using the risk profile from the financial plan and the considerations from the analysis of your existing assets, we manage your capital in one of our strategies that corresponds with your risk level which are designed using our proprietary market outlook, historical asset class performance, manager interviews and internal expenses. 

Ongoing Maintenance, Monitoring, and Reporting 

Ferris Capital monitors market and portfolio changes and keeps you informed on performance, risk and goals-based progress through quarterly calls or meetings. We also look to address any liquidity needs or life changes that may impact the long-term financial plan. 

Why Ferris Capital?

All investment firms offer “financial planning”. However, not all investment firms are bound by the fiduciary standard and not all firms are conflict free. Ultimately the most important difference between firms comes down to the people, their experience, and the service they provide.

At Ferris Capital, our independence ensures that your interests always come first. We believe that transparency and integrity are critical to building long-term relationships. We’re devoted to a client experience that revolves around the needs of you and your family, not around commissions.

Our work doesn’t end with a financial plan; that’s where it begins.

 

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