06 Jun Bye to money help from parents, hello debt

Q. My father died last year. He used to pay for things like family vacations and other extras for my family. I’ve been spending the money he used to spend for us, but out of my pocket. Now I’m $20,000 in debt. I don’t want to keep going like this. I’ve inherited $900,000 in an IRA. Should I take money out to pay off the bills and then take bigger distributions every year to cover what my dad would have paid for if he was alive?
— Working it out

A. Your father’s generosity while he was alive has put you in a precarious position. If you’re not careful, you could be in for some life-changing money mistakes.

Most people who inherit money blow it, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.

That’s because many people who inherit funds don’t invest the money, but rather go on a spending binge until the money runs out, Lynch said.

Older folks with good intentions — to help their families — often put their heirs in the position of living above their means. But that can’t last forever.

“When they run out of money they are in a worse position than when they started,” Lynch said. “The family has expectations that you are always going to pay for vacations, everyone is living on a higher income level then they should and when the money faucet shuts off, things get crazy.”

People end up having money for very simple reasons, Lynch said. They spend less than they earn, and they save money on a very systematic basis through all kinds or market conditions.

“It’s not rocket science,” he said. “If you spend more than you make, over time you will have big problems.”

He said grandparents will often give their kids and grandkids additional cash to help buy cars, schools, clothes and help subsidize their families.

“The long-term problem is the kids and grandkids start living a lifestyle that they cannot afford,” Lynch said.

When the grandparents can no longer afford to help, trouble starts, Lynch said.

“Your kids stop liking you. You are now seen as the parent trying to control your kids with money and you stopped because you did not approve or your son- or daughter-in-law,” he said.

It also puts the adult children in a bad financial position.

Let’s assume between vacations and other things that grandparents are giving $15,000 to $20,000 annually. These are after-tax dollars, meaning the adult children now need to make $25,000 to $35,000 more in earned income just to be at the same level, Lynch said. And generally, he said, that’s not possible and they go into debt.

This is what’s happening to you.

Finally, the change often makes the older person feel terrible.

“Your kids are mad at you, your grandson can’t go to private school anymore, and you are concerned about your own personal finances,” Lynch said. “What if you need long-term care? Will your kids and son- or daughter-in-law take you in their home and take care of you?”

Lynch said he often suggests to grandparents who want to spend money on their kids and grandkids, to consider paying for a beach house as a way for the family to spend time together.

For your specific situation, the damage is already done. Your generous dad has now put you in the position of being accustomed to a certain level of spending, and you have this inheritance to pay for it — for now.

Be smart so the money lasts.

Let’s assume you’re age 50. That means your Required Minimum Distribution (RMD) from your inherited IRA is around $30,000 a year, which is taxable.

Lynch said between federal and state income taxes, you’d take home about $20,000.

He said you should invest $10,000 and use the other $10,000 to have fun with the family.

Lynch said the goal of any parent should be for their kids to be independent. To be able to take care of their spouse and their family without their help.

“Helping them occasionally is great as I am sure they really appreciate it, but having them `on the dole’ is not a good long-term solution for anyone,” Lynch said. “This situation with the father passing and now the son is in debt shows exactly my point.”

Now, what should you do?

Lynch said it depends.

“If paying this off one time will solve the problem, not just postpone it, I am happy with paying it off with a larger distribution,” he said.

First you should check with your tax preparer to make sure the larger distribution doesn’t push you into a higher tax bracket.

“If it just postpones the problem and you are going to end up with the same amount of debt again in a short period of time, I would see what I can do to eliminate the problem first — cut spending — then pay it off,” Lynch said.

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This post was first published in June 2017.