26 Sep When to Give Your Children Their Inheritance
By: Barry E. Haimo, Esq.
September 25, 2019
When to Give Your Children Their Inheritance
There are countless ways to divvy up an estate among the children when a parent has passed, and each family’s legacy and methods for passing it down are unique. However, the factors that must be considered when making inheritance decisions are the same for every parent.
Concerns about how an inheritance will affect your child(ren)’s drive and choices in life are understandable. Wealth can sometimes feel like an anchor on a child’s sinking ship – a poor replacement for something irreplaceable.
So how do you bestow your riches without weighing your children down? Sometimes, it’s a question of when more than how.
Protecting Your Children’s Inheritance Through Trusts
If your children are still under 12 when you begin estate planning, your plans will likely encompass a number of stages. Should something happen to you suddenly while they are still at an age in which they are completely reliant upon adults, they are certainly not going to have the capacity to manage anything near a substantial inheritance.
Those of you who have more than one child are also probably acutely aware that each of your children has their own personality and way of thinking. At this young age, there’s no way to be sure who is going to wind up being a whiz with wealth and who won’t be able to keep a dime to their name.
For these early years, it would be wise to consider setting up a trust. This planning tool protects your child’s inheritance until they’ve reached a level of maturity and understanding of how to manage money – and themselves.
As they get older, consider employing a popular “financial test” to help you gauge what terms would best set each child up for success in their lives.
Giving Your Children a Financial Test
If you are wondering what your heirs might do with a substantial amount of inherited funds when you’re gone, why not do a test run with a little less?
Current gift tax law allows a single parent to give $14,000 maximum per person (no limit to the number of gifts) and a couple may give more than double that. This is actually becoming something of a trend, with many parents offering up a one-time budgeted amount of money to each of their children – no strings attached.
Then they sit back and watch what happens.
Do you think your children would save that money for a rainy day? Will they invest? Pay off debt? Do they live and breathe by the philosophy that you only live once, and book a weekend in Vegas? How do you think this little experiment might impact the way you plan on giving them their inheritance?
This is also likely a point when it becomes more apparent than ever whether you’re going to need separate trusts for each of your children.
Popular Inheritance Disbursement Options
Ultimately, you know your children best. You also know that like every other part of raising them, often each child requires a different approach. Three of the most popular ways parents choose to disburse their children’s inheritance are age-based, incentivized, and non-cash distributions.
Our children aren’t born equipped to make money decisions. Financial management isn’t an innate part of our DNA (in most cases). As we grow and change and learn from our life experience, we come to understand how money fits into our lives.
For this reason, one of the most popular estate planning strategies for parents is to name a distribute income as needed (by a trusted adult) from trust assets when the children are young, and set up principal payouts when they are older, have their own careers, and a higher level of sophistication when it comes to finances.
An example of how to split up distribution would be to allow a modest monthly stipend until their mid-20s. At that point, you can have the first of three distributions happen. The other two could be sometime in the child’s mid-30s, and the remainder of the inheritance could go out between age 40 and 45 to spend how they wish.
A schedule like this often coincides with major life changes and an opportunity for parents to help their children get through them from beyond.
If you are concerned about a child’s motivation or ambition being affected by what you have to offer them, and/or have exact life events in mind that you’d like to help with, an incentivized payment play might be a good fit.
Incentives can be as creative as you’d like. Some common incentives include completing various levels of education (often through an “educational trust”) and/or other training and life events like buying a home or starting a business. We’ve even seen parents create various systems of salary matching to keep their children motivated.
For those parents who are uncomfortable with distributing large amounts of cash, there are other alternatives to explore. Many realize average costs for mortgages, going to school, and so on are substantially higher than ever before, and only continue to grow.
To help reduce the burden of these obligations throughout the lives of the next generation, there are opportunities to delegate distributions to things like annual taxes or interest, or even a portion or all of the direct costs of those things.
The possibilities are endless. A little forethought and planning can create an environment in which your offering can serve as a means to an enriched and fulfilling life for them. And isn’t that what everyone wants for their children?
Making the right decisions about when to give your children their inheritance can set them up for a lifetime.
Consider these strategies, talk to an experienced estate planning attorney about your financial goals for your family when you’re gone, and develop a plan together for how to best reach them.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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