Money Makeover: Handling an inheritance wisely
In 2006, Lisa and Clovis Blackwell began receiving an inheritance that amounted to about $160,000 from the estate of Clovis’ father.
The couple used nearly half the money to make a down payment on a condominium in Pasadena, and much of the rest went toward living expenses, which increased after they had a baby.
The money went fast. Nearly all of it is gone, and the condo it allowed them to buy is underwater.
But the Blackwells are getting a second chance at handling inheritance money. This year they’ll be getting $110,000 left them by Clovis’ grandfather.
“We want to figure out how to work with [the money] and not have it go up in smoke too,” Lisa said.
If they do, they’ll be bucking tradition.
Financial planners generally assume their clients will spend through most windfalls, including inheritances, in 14 to 18 months, said Sandra C. Field, founder of Asset Planning Inc. in Cypress.
The primary reason the Blackwells’ first inheritance disappeared, Field said, is that they didn’t successfully transition from getting that money to living off one salary.
“It’s really too bad, because they weren’t able to face the reality of living on one income,” Field said. “By now, they should have had a nice portfolio of investments.”
Lisa, 31, makes $55,500 a year teaching 10th-grade English at a public school in Sun Valley. It’s a substantial drop from her $80,000 salary last year, when she got a stipend for holding an elected faculty position and worked through the summer. Lisa is also now on furlough one day a week.
Clovis, 32, suffers from rheumatoid arthritis and has not held a job in two years. In that time, he completed a master’s degree in fine art, and he hopes to build a career selling his work in galleries and teaching at a local university. For now, he takes care of the couple’s 6-month-old baby, Xavier.
The condo, in an area Lisa described as “sketchy,” was purchased four years ago for $374,000. Today the property might be worth $220,000 or less. Two units in their 10-unit building have sold through foreclosures in the last year. Another is being offered through a short sale.
In addition to helping cover the down payment on the condo, the inheritance from Clovis’ father was used toward putting Clovis through graduate school, paying off one car and buying another. Otherwise the money went toward general expenses.
But those expenses were too high, Field said, considering the household income, and the couple nearly drained the windfall. According to her calculations, the Blackwells were spending about $600 too much per month.
The planner quickly identified a route to eliminating most of that monthly deficit: They could cut out their charitable giving, which currently amounts to almost $500 a month, including $350 to their church.
“They are giving away a huge, huge amount of money,” Field said. “I have clients making $200,000 a year who sit on church boards not giving away that much.”
Now that Clovis’ arthritis symptoms have lessened, Field said, he should start earning at least $500 a month to get a sense of what these charitable contributions are costing his family.
“I want you to feel the impact of that $500,” she told him, because large windfalls often change people’s perceptions of the value of money.
Field suggested that while caring for Xavier during the day, Clovis could also baby-sit a couple of friends’ children to bring in more income.
As for the mortgage, Field said the couple should apply for a loan modification to try to get the monthly payment down from the approximately $2,200 they are now paying. But loan mods are not easy to get.
In coming months, the Blackwells expect to receive the $110,000 inheritance. Field recommended that they not use a major portion of it to pay down the condo loan. “You don’t want to put much more money into this property,” she said.
The Blackwells had hoped to move and keep the property as a rental. But they could probably get only about $1,500 a month in rent, for a negative cash flow of nearly $700 a month on the property.
Instead, the planner advised them to sell the property, but not until next year, to allow the negative effects of the foreclosures and short sale in the building to lessen somewhat. Also, by next year home prices are likely to rise, if only modestly. Field said they might be able to get as much as $250,000 for the unit.
The Blackwells could use $20,000 of the inheritance money to make up the shortfall to the bank, emerging from the sale with their credit scores intact.
Then the couple could use $60,000 of the inheritance as a down payment on a $300,000 home in the area, with a garage that Clovis could use as an art studio and a yard for Xavier and the family’s two dogs.
But before making that move, Field said the couple should increase household income and stop all deficit spending. The Blackwells should also have $20,000 in savings as a protection against crises.
“Teachers are in the most perilous position right now,” Field said, because of cuts in government spending.
The couple said they were motivated. Lisa said she would take a continuing-education course this summer to qualify for a slight salary bump next year. She also plans on teaching through the summer. Clovis said that in addition to taking on baby-sitting, he plans to apply to teach art as an adjunct professor at a local college.
Field urged the couple to start putting about $50 a month into a 529 savings plan for Xavier’s college education. And she said they should keep the inheritance money in a mix of short- and long-term Treasury bonds.
“If you are going to need that money any time in the next five years, do not put it in the market,” Field said.
As for their charitable giving, the planner said, “You have the rest of your life to do wonderful things when you are making more money.”
Clovis wasn’t thrilled with that idea: “I have a hard time not being generous,” he said.
“Maybe if we can’t give as much money,” Lisa said, “we can give more time to our church.”
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