If advisors help their clients avoid pitfalls in building and receiving an inheritance, they will do a better job preparing them for retirement, according to a recent report from the CFP Board.

Jill Schlesinger, senior CFP Board ambassador, says that up to one-third of Americans can expect to receive a significant inheritance in their lifetimes -- planning around that wealth transfer will help clients meet their long-term goals.  Advisors often cite conventional wisdom that family wealth dissipates in three generations, most often due to behavioral issues.

“We kind of call this the fat, dumb and happy moment, the heirs become fat, dumb and happy in generation three and they forget about the jobs they’re supposed to do as stewards of wealth,” says Schlesinger. Families today face demographic pressures -- older generations are living longer, and younger generations are taking longer to become independent, often causing generational wealth to dissipate faster than expected.

Schlesinger cites other research, from Ohio State University’s Center for Human Resource Research, that shows that Americans save only half of what they receive from an inheritance. The research also reported that almost 35 percent of heirs end up seeing a decline or no change in their wealth after receiving an inheritance.

The decisions that heirs make are often clouded by emotion, says Schlesinger, because they tend to coincide with loss. Ideally, a financial planner should be prepared to deal with those emotions.

“You have a really intimate relationship with these people,” she says. “They’re literally undressing themselves emotionally and financially for you, it’s sort of sacred what they’re doing. If you’ve built good relationships, you’re already going to be in the middle of it.”

Heirs make five critical mistakes that lead to financial loss, says Schlesinger.

No. 1 – Spending mindlessly

Mindless spending often starts small, as clients decide to spend on a personal luxury for the first time, but can start to snowball, says Schlesinger. Advisors must help clients resist the urge to splurge.

“Many of these clients will be coming to an advisor for the first time after their inheritance,” she says. “They have to start by tracking their own money, they have to become accountable to themselves. It’s a pain in the neck, it’s like telling clients to eat their vegetables.”

No. 2 – Going it alone

Americans, accustomed to flying solo when preparing their taxes or making decisions within a 401(k) might also be tempted to take a do-it-yourself approach to allocating or spending their inheritance. Schlesinger argues that many inheritances should involve a team of professionals that includes an estate attorney, an accountant and a financial advisor.

“Some people are constitutionally able to go it alone,” she says. “Once they receive an inheritance, just the sheer amount might intimidate them. Money is emotional, even a CFP professional or investment advisor would probably be better served by a team of professionals.”

No. 3 – Acting too quickly

Clients have dreams and goals, says Schlesinger, and after an inheritance may be tempted to sell their home or quit a job too early in the process. Advisors can help them think clearly about their choices when emotions run high.

“People just want to get the process over with, settle the estate and buy the first idea or product that comes along,” she says. “What’s incredibly important is that the advisor slows things down, then implements a game plan. Even if someone comes in during a moment of crisis like death or divorce, just start with a plan.”

No. 4 – Becoming paralyzed in the investment process

Sometimes, when faced with a windfall and the huge choices that follow, clients are unable to make investment decisions. Schlesinger says that the current bull market, now eight years old, and record equity valuations exacerbate investor inertia.

“This issue is often addressed during the planning process, that’s why it often takes 60 days to finalize and implement a plan after the moment an advisor meets a client,” she says. “If the client is nervous, a planner is probing what they’re nervous about. Show them data that tells them they’re better off investing a lump-sum, but if they’re still reluctant and that prevents you from executing the plan, let them average in.“

No. 5 – Providing for family and friends, but not themselves

Heirs tend to be generous and often want to help their children, friends and other relatives and charitable organizations before thinking of their own welfare, says Schlesinger. Advisors can guide clients towards creating or updating a financial plan before exercising their generosity.

“Even I get stuck on this topic, because it’s so emotional,” says Schlesinger. “This is why people can really benefit from working with someone like a CFP professional, they can help navigate incredibly emotional topics in a reasonable way. If clients keep putting their money out there, they’re not going to be able to meet their goals, we have to be clear about that.”