Ask Liz Weston

Dear Liz: Your recent advice about investing an inheritance prudently is all good. However, I think most people waste unexpected money, spending it in dribs and drabs with not much to show for it. So, to your advice, I would add this:

Take a minor portion of the inheritance and spend it on some indulgence you would never have done otherwise. About 15 years ago, I used about 20% of a sizable inheritance to take my family, including kids, spouses and grandkids, on a three-week African safari. The result? We all have wonderful memories of a trip in which family members bonded closely with one another, and of once-in-a-lifetime sights and experiences.

The rest I invested, spent on college tuition and used for retirement. I can’t account for it all, but I have no regrets about that Africa vacation.

Answer: Your advice is terrific. It’s important to enjoy our windfalls and even more important to invest in experiences and memories that last. Your family is lucky to have you.

Dear Liz: I would like to know how best to use a $100,000 inheritance. I am a stay-at-home mom, age 46. My husband, 42, earns $100,000 a year.

We owe $132,000 on our house and have no other debt. We pay off our one credit card in full monthly. He puts the maximum into his 401(k). We have two sons, ages 5 and 8.

Should we use the money to pay down our mortgage? I’m not interested in saving for college. We will be retiring about the time the kids are ready for college and we plan to have them take out student loans.

Answer: If you can save for college, you probably should.

College costs show few signs of moderating, so your older child might face a bill of $140,000 for an in-state public college or $200,000 or more for a private or selective public college. The cost for your younger child will be even higher. If they borrow the entire cost, they’re likely to remain financially disadvantaged for years. Students who overdose on loans often can’t save enough for retirement and delay starting families and buying homes because of their debt. Anything you save for them could reduce that terrible burden.

You also might want to rethink the idea of retiring when they start college. Even if your husband has been maxing out his retirement fund, it’s unlikely he’ll have saved enough by age 52 to last the rest of your lives, particularly if you have to start paying for health insurance on your own. (Medicare isn’t typically available until you’re 65.)

You didn’t mention savings. Most people should have an emergency fund equal to three months’ expenses, but families with just one earner typically should shoot for six or even nine months’ worth.

In any event, you almost certainly have better things to do with your money than pay down low-rate, potentially tax-deductible debt such as a mortgage.

A better approach might be to divide your inheritance into thirds, investing a third into an emergency fund, a third into your boys’ educations and a third into retirement funds.

A visit to a fee-only financial planner could help you sort through your options and clarify your goals.

Dear Liz: In a recent column you discussed the issue of fairness in gifting college funds to nieces and nephews. We have an issue closer to home in setting up our bequests to our grown children.

We have been giving our daughter financial assistance that we have not given our sons because we don’t feel they need it. Our daughter is in her mid-20s and has a learning disability. Our sons know we have been helping, but they don’t know the exact nature or value of the assistance.

We want to ensure that our daughter gets a larger inheritance to compensate for her disability, but how do we do that while being fair to the others? Our attorney helped us set up a family trust in which our three children will receive equal shares of the bulk of our estate.

At his suggestion, the special assistance will go to our daughter by naming her a sole beneficiary of one or more of our retirement accounts. Does this sound like a good plan?

Answer: Tread very, very carefully here.

There’s a fundamental difference between doling out assistance unequally while you’re alive and doing so once you’re dead.

While you’re alive, your sons are paying the “success tax” — not getting as much from you because they’re doing well. Many grown children in this position are able to accept the disparity because there’s an unspoken understanding that you would help them, too, if they fell on hard times.

Once you’re gone, though, there are no more opportunities for help. How you bequeath your estate is pretty much the last word, and your kids may very well see in your distributions a reflection of your love for them.

That’s why even minor inequalities in estate distribution can set off nasty, hugely emotional battles among heirs. These bad feelings can, unfortunately, translate into lifetime estrangements, which is surely not an outcome you’d want.

Of course, if your daughter’s disability is severe and will clearly affect her lifetime earning potential, then an unequal distribution may well be justified. You shouldn’t necessarily assume, however, that her disability will translate into failure. Plenty of successful people have overcome learning disabilities, including Virgin Atlantic Airways founder Richard Branson, inventor Thomas Edison, actress Whoopi Goldberg and artist Pablo Picasso.

You also can’t assume that your sons’ success will continue unabated. Accident, illness and business reversal can affect anyone, so that the child who seems like a highflier now could be the one who needs the most help in the future.

If you do decide on an unequal distribution, consider discussing your estate plans with your children.

This is probably a talk you’d rather avoid, but openness now will avoid an unpleasant shock later and give all concerned a chance to discuss their feelings about the situation. You may or may not hear something in this discussion to change your mind, but at least you’ve given your heirs a chance to be heard — an opportunity that’s obviously lost once you’re gone.

Dear Liz: My brother and I are nearing our mid-50s. He is married; I am not. Neither of us has children. When our parents died 11 years ago, we inherited their house equally.

I live in it; my brother and his wife live in another state. He and I share taxes, insurance and a home equity loan. Other than that, all expenses are — and should be — my responsibility. He is livid that I am not leaving him my half of the house when I die, even though he is leaving his half to his wife — which I completely understand.

When I realized he was furious about this, I offered to make him the sole beneficiary of the house in my will if he will do the same for me. He will not, yet he remains angry, somehow believing that my being single should restrict my choice of beneficiaries. What am I missing here?

Answer: Once you step back a bit from the spat, you might see that neither of your positions is entirely unreasonable.

A home is typically a major asset, and you want to be able to leave it to a beneficiary of your choosing. So does he, and his wife is the natural choice.

But he’s also probably dreading the idea that you’ll die first and he’ll end up owning the property with someone else. The constant negotiations and decisions required in homeownership can be excruciating and a cause for major conflict even when you have familial ties to bind you. It can be much worse when you don’t.

The other problem with your solution — “I’ll leave you mine if you leave me yours” — is that you’d need to have a lawyer draw up what’s known as a will contract to make your promises binding, said Los Angeles estate planning attorney Burton Mitchell.

But remember, things change, and your agreement may not seem so good years later.

“The sister could always marry in the future. The brother could always get a divorce. Either could adopt a child,” Mitchell said. “No one should assume that the future is static and the facts won’t change.”

Before you do anything, you should check how your home is currently titled. If you and your brother are joint tenants, then he typically would automatically inherit, regardless of what your will or other estate planning document says.

If you want to leave your share to someone else, you probably would need to hold title as tenants in common.

There are a number of options you might want to consider and discuss. Among them:

• Take out a mortgage and buy him out. This could have financial implications for both of you. You might have trouble making the payments on a new loan, and he probably would owe capital gains tax for half the appreciation since your parents died.But he would get his share of the asset in cash, and you should be relieved of any future recriminations on the beneficiary issue.
• Sell the house and split the proceeds. This means that you’ll have to move and that both of you could have a tax bill. (Because this is your primary residence, you’re allowed to avoid paying tax on up to $250,000 of the gain since your parents died. If your profit is more than that, you will owe capital gains tax on the excess.)But this could solve the issue of who leaves whom what.
• Wait a decade or so and then get a reverse mortgage to buy him out. Reverse mortgages allow you to tap the equity in your home without having to repay the loan until you move, sell the house or die.You can get a lump sum, a line of credit or a stream of monthly checks. The older you are when you apply, the more money you can borrow, although there are limits depending on where you live.

  If you’re interested in this possibility, check out the information about reverse mortgages at the AARP website or consult Tom Kelly’s book “The New Reverse Mortgage Formula” (John Wiley & Sons, 2005).

• Do nothing. This is always an option. You should be advised, though, that your brother may have a trump card whether he knows it or not. As a co-owner, he could sell his share of the house or go to court to force a sale of the property. If that’s not an outcome you want, you’ll need to find a solution that works for both of you.