The Legendary Rich Relative And Inheritance Problem

In the field of finance and behavioral counseling, there is an oft-repeated hypothetical presented to professionals in the industry that call for them to recognize that people have different priorities when it comes to reaching goals. Often called the “Rich Grandparent”, “Rich Uncle”, “Rich Aunt” or merely “Rich Relative” hypothetical, the problem goes like this:

Your rich relative dies and leaves a will making you one of several beneficiaries—the gift you are set to receive is $20,000 in cash. However, a will contest has been filed by other relatives not mentioned in the will and the case is due for trial in two years. If the will contest is successful, you will get $0 (there is a second, earlier will that will be introduced at trial in which you are not included).

You have received a settlement offer for $7,500 (after all applicable fees), and you would receive the money within 30 days. You decide to seek the advice of a lawyer you trust, and he tells you that you have a “good chance” (which he estimates to be 60%-85%) of winning the contested will and walking away with $15,000. The risk is that it will take two years to resolve itself, and there is also a small but not insignificant chance that you will end up with $0 in the end.

Knowing these facts, how would you proceed?

The appeal of this hypothetical set is that, among large groups, the answer is split with about half taking the $7,500 and the other half going to trial in pursuit of the $15,000. The point of all of this is to get people thinking about the factors that go into long-term decisionmaking and problem-solving. If you chose the $7,500 offer, you are likely someone who prioritizes: the present value of guaranteed money, a desire to avoid prolonged family stress and anxiety, a conservative sure thing, and a desire to avoid a diminishing estate that gets eaten up by legal fees. Someone who seeks the $15,000 after two years prioritizes: honoring the final wishes of the dead, trusting the advice of someone who says you have a good chance of success, and perhaps seeks the greatest benefit to himself/herself which can be tied back to the principle of honoring final wishes.

There is also the matter of loss of opportunity. The only way you can avoid this is by pursuing the $15,000 and getting it. If you choose the $7,500, you may have a lingering regret about what would have happened if you pursued the good chance. If you chose the $15,000 and that “small chance of loss” turns out to be the end result and you end up with nothing, then you will probably come to regret not just taking the $7,500 two years earlier.

As to how I answered the question? I broke it down into three decision trees. First, I would evaluate the intent of the person making the donation. If I felt that the donor had intended the money for me exclusively, then I would pursue $15,000 unless necessity dictated otherwise (I’ll get to that point in the second decision tree). If the intent was ambiguous, I would study my own needs and the good-faith conduct of others before making my decision. And if I did not think that the donor intended me to have the money, I would pursue nothing (interestingly enough, this isn’t cast as an option for those doing the exercise).

Secondly, I would evaluate the necessity of the money. If you are drowning in expenses that can’t wait two years, then you take the $7,500 if it is essential to survival to avoid eviction, inability to buy food and transportation, or whatever it is you consider essential. If I was comfortable financially, I’d be more likely to wait and see it through (and accept the unlikely risk of ending up with nothing).

And thirdly, if my basic self-preservation were not tied to the money, I’d study the circumstances surrounding the issue: Are the other people acting in good faith? Is it really something ambiguous that could fairly lead to the conclusion that the first will reflected donor intent? Were the other potential beneficiaries put on notice that the second will existed and was created by the donor with sound mind, and are only pursuing a claim out of greed? Those circumstances would affect my decision if the First Two Decision Trees didn’t lead to my answer.

Of course, the whole point of the exercise is that people can answer these problems very differently, and it’s aimed at getting professionals comforting with recognizing that their customers have their own ideas of what would make them happy, and how different value systems lead to different outcomes (after all, it’s your life, and you should get to write the script as you see fit).

The ongoing concern, of course, is that professionals do what they think is best or what their clients should want rather than what their clients actually want. In the field of money management, you have this common occurrence where: (1) finance professionals charge 1-2% to create portfolios that are essentially index funds, so they can maintain their careers by never being exceptionally bad, or (2) they take unnecessary risks because they believe outperforming the S&P 500 is the only way to be successful and accumulate more capital from new clients in the future.

The problem with that line of thinking is that it ignores client goals. Your goal might be to receive cash in the mail a few times per year that will cover your expenses without having to lower your principal going forward. If that is your objective, companies like AT&T and GlaxoSmithKline (with their 5% and 6% yields, respectively) would make a lot of sense even if they don’t beat the S&P 500—the point is that their dividend yields are triple the S&P 500 (although, as an aside, even though AT&T and GlaxoSmithKline didn’t outperform the S&P 500 from 2000 to 2014, I personally think their odds of at least matching the S&P 500 from here are much higher going forward because AT&T has transitioned from being valued like a tech company to being valued like a utility, and Glaxo has transitioned from being valued like a 1990s Johnson & Johnson to being valued like a Pfizer).

I think the reason why you don’t see overwhelming satisfaction with financial advisors is because you don’t hear many financial advisors talk about money being the tool that delivers what their clients desire. Sure, they might pay lip service to catering to their clients, but then when they actually interview them and make decisions, they come to regard “listening to clients” as a substitute for “waiting to speak” rather than treating it as an opportunity to thoroughly understand someone’s dreams and long-range goals and then craft a concrete step-by-step plan to get there.