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.”

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