Can ‘Terror Management Theory’ Explain Inheritance Spending? 

A dollar is just a dollar, right? Not always. 

A duo of researchers from Texas Tech University and the University of Alabama have published a new paper that investigates whether inheritances are managed differently than other financial windfalls, testing predictions from (the very scary sounding) Terror Management Theory. It turns out some 41% of heirs had their net worth fall back to, or below, their pre-inheritance level when measured about 12 months later, and there’s evidence to suggest that these assets are essentially “tainted” by thoughts of death and mortality, resulting in added pressure to spend. Advisors could benefit from factoring this dynamic into their planning process. 

“That is not what most clients expect,” said Russell James, professor of charitable financial planning at Texas Tech. “It is also not what many planners expect, either. We often treat inherited wealth like any other money. A dollar is just a dollar. But heirs often do not experience it that way. It is money tied to a death, and that matters.”

Quickly spending down an inheritance isn’t inherently problematic, James told Advisor Upside, but the findings are troubling when considering factors like longevity risk and a lack of guaranteed pensions. Money that could be kept to backstop key retirement risks might instead be spent on discretionary items. 

Messaging Matters 

This behavior is exactly what James and his collaborator, Cory Thompson, expected based on experimental research. The death of a loved one triggers what researchers call “mortality salience,” which just means that most people respond to death-related discomfort with avoidance. “Psychologically, what we want is to avoid the death-reminder that the inherited assets bring,” James said. “The data shows that’s often what happens. The death money goes away, often very quickly.”

Even savvy financial advisors (and the clients themselves in many cases) overlook these dynamics. Instead, they are solely focused on factors like the tax efficiency of the transfer. 

“If the plan transfers the wealth to the next generation with minimal tax loss, we’ve apparently succeeded, and if it transfers rapidly, the plan went even better,” James said. “Except that’s not how it works in reality.” Psychologically, the worst possible time to leave money to loved ones is at the client’s death. That’s when emotions are at their highest, and the inherited money feels most like “death money.”

An Emotionally Sound Strategy. All this leads to an obvious conclusion, James said. The estate planning processes should ask and answer a deceptively simple question: How much wealth would you like transferred in one lump sum at death and how much spread over time?

“That one question can change the conversation,” James said. “If we just ask the question, we’ll find that many people won’t choose one lump sum at death. If we provide a bit of real-world context, even fewer will choose it. Simply put, it’s important to give the heirs more than one shot at their inheritance.”