Segregating Inherited/Non-Inherited Funds - Philosophy

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CashConfessions
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Segregating Inherited/Non-Inherited Funds - Philosophy

Post by CashConfessions »

Hello,

Was curious about board members' approaches to segregating inherited and self-earned funds.

I understand money is fungible, but I keep my earned-money account separate from my inherited account. I (late 30's) feel like I've been pretty successful in my own right, but keeping the amounts separate lets me see "what I made" versus "what I inherited." It's about 80% earned to 20% inherited if if makes a difference. Although I'm not a big spender, I feel the money I earned is mine to do with as I please, versus the inherited money which has a stigma associated with spending it--at least the principal.

Realize that I'm in a rare, and (probably) fortunate, position, but I'd appreciate any insights that others are willing to share.

Thanks.
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Watty
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Re: Segregating Inherited/Non-Inherited Funds - Philosophy

Post by Watty »

If you are married or might get married then it makes total sense to keep the inherited money separate so that you would get it in a divorce. That of course depends on the details and your state laws.
Alan S.
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Re: Segregating Inherited/Non-Inherited Funds - Philosophy

Post by Alan S. »

CashConfessions wrote: Mon May 03, 2021 10:49 pm Hello,

Was curious about board members' approaches to segregating inherited and self-earned funds.

I understand money is fungible, but I keep my earned-money account separate from my inherited account. I (late 30's) feel like I've been pretty successful in my own right, but keeping the amounts separate lets me see "what I made" versus "what I inherited." It's about 80% earned to 20% inherited if if makes a difference. Although I'm not a big spender, I feel the money I earned is mine to do with as I please, versus the inherited money which has a stigma associated with spending it--at least the principal.

Realize that I'm in a rare, and (probably) fortunate, position, but I'd appreciate any insights that others are willing to share.

Thanks.
This is a personal decision, whatever makes you feel better.

Fact is, there should be no stigma in spending the inherited money for good use. Whoever left you the money likely wanted you to use it judiciously. Of course, blowing it by day trading or at your local casino is something entirely different.

On a related note, if you are married, keeping the inherited account separate means that it is not treated as marital property in the event of a divorce (unless you want it to). If you commingle the assets in the same account, it probably would be treated as marital property, or at best you would have to keep much more detailed records.

I suspect that most people would combine the funds unless there was a financially specific reason not to, especially if you are single. If you keep the property separate, what criteria will you apply in determining when you would tap that account? Would you tap it pro rata with your earned funds, leave it for special needs, etc?
123
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Re: Segregating Inherited/Non-Inherited Funds - Philosophy

Post by 123 »

We have segregated a significant inheritance into a separate taxable account. One reason we did that was as a remembrance instead of just lumping it in with everything else. We have a higher risk tolerance for those funds so it is invested somewhat more aggressively (still in line with bogleheads). So collectively we have a higher risk tolerance as a result of the inheritance, which make sense. Over time I see less reason to keep it segregated as the growth makes the original inheritance amount less significant. Our asset allocation is more accepting of risk than the original owner.

I think the same sort of issue sometimes comes up when account holders keep past workplace-related accounts separated to provide some kind of (mental) connection to a former workplace. Eventually most people "move on" and rollover those funds to a current employer 401k or IRA account.
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Afty
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Re: Segregating Inherited/Non-Inherited Funds - Philosophy

Post by Afty »

I get the sense that OP understands this, but money is fungible and there’s no real difference between money you earned and money you inherited. There are good practical reasons to keep it in separate accounts, e.g., keeping it separate from marital property, but I’d urge you to treat it as part of your overall portfolio and do tax-efficient fund placement even in the separate account(s). I’d also caution against letting your emotions affect your investment decisions — that’s a great way to make big financial mistakes.

I for one made this mistake with an inheritance. I kept it separate and didn’t reallocate it from what the much older person I inherited it from had invested in, largely because I felt uncomfortable about receiving the inheritance since I hadn’t “earned” it. I missed out on 5 years of market gains because I had it in overly conservative investments for my age and risk tolerance. Plus I paid a lot of capital gains when I finally did bite the bullet and reallocate it.
Scotttheking
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Re: Segregating Inherited/Non-Inherited Funds - Philosophy

Post by Scotttheking »

Segregate. It isn’t mine, I am a steward of it.
livesoft
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Re: Segregating Inherited/Non-Inherited Funds - Philosophy

Post by livesoft »

Non-segregated. No sentimentality attached to it whatsoever. That leads to behavioral finance mistakes. I have even told my heirs not to attach any sentimentality to anything they inherit from me and explicitly given them permission to sell anything they want and do with it what they please. My asset allocation is NOT their asset allocation after all. And I have no intention of dictating lives from my grave. Actually I will be cremated, so no grave anyways.
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Jablean
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Re: Segregating Inherited/Non-Inherited Funds - Philosophy

Post by Jablean »

Most of mine is segregated because it's in inherited IRAs & Roths. But since I'm required to take RMDs (stretch) then I use those RMDs to fund my own Roth - I know my retirement was a concern for them so I use it for that. (same broker = easy access) It was harder to segregate life insurance but my credit union pretty much allows unlimited accounts so I did and I use it for bigger things like property tax. (I know it's fungible but it's nice to say) But now it has been four years and everything is getting more and more comingled and I'm coming to emotional grips with that. I have it in my net worth charts and I send up a note of gratitude every time I look at that year. I've put DH as beneficiary but I have been looking at the threads on how that means it might be diverted, however unlikely, from DS hands as the eventual holder if there are funds left.
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