Many parents want to pass on at least some of the assets they have accumulated during their lifetime to their children. But for every reason why a person would want to provide an inheritance to their child, there is a concern over how the inheritance will affect the child. The pros and cons of providing an inheritance are very specific to the situation. The age and responsibility of the child, the amount of the inheritance as well as the child’s work ethic and career can all effect the decision on how to distribute assets. This article will discuss some of the major issues that parents deal with when deciding how to fit children into their estate plan, and some of the options they have to accomplish their goals while avoiding negative outcomes.
How much do you want each child to receive?
One consideration is whether you want to treat your children differently in your estate plan. There are many reasons why a parent would want to treat their children differently in terms of inheritance. For example, one child could have a much better paying career, or a parent could want to reward a child that was able to act as a caregiver. In the case of children with different careers, if it is an option, rather than treat the children differently, it’s often a good idea to use a trust to distribute the assets to all of the children based on need. That way, should the child with the more successful career get sick or fall on hard times, some of the inheritance is available to help them through those tough times. No matter the reason, if you are going to treat your children differently, it’s a good idea to talk to them about your intentions beforehand. Having this conversation can help clarify your intentions and will hopefully avoid bad feelings and will contests in the future.
When do you want the child to receive the inheritance?
Another consideration many people have when leaving money to their children is whether the child will be able to handle the money. This is a very legitimate concern. Studies have shown that a third of people in the US blow their inheritance, more than two thirds of inheritances don’t last past the 2nd generation, and ninety percent of inheritances are gone by the third generation. There are several options that you can use to try and make sure that your families wealth is maintained and available to help your children and grandchildren and beyond.
You can give the assets to your child outright. This allows them to use the assets immediately, but those assets will not be protected from lawsuits, divorce, creditors, or overspending.
Alternatively, you could have the inheritance given in installments. This is a good option if you are worried about mismanagement, as only a percentage of the total amount is available at any one time. There are some drawbacks however. Depending on how the provision is drafted, it is possible the entire inheritance never becomes available or, on the other hand, it can become available all at once. Another drawback is that, as the installments are paid, they become available to creditors in the same way as with a lump sum.
A third option is to have the assets placed in a trust, and then distributed according to the terms of the trust. This is a very good option because the trust provides asset protection. This is because the trust actually owns the assets in the trust, not the beneficiary. Additionally, the grantor of the trust has a great deal of flexibility when creating the terms of the trust. For example, if you worry that a large inheritance will affect your child’s work ethic, you could limit the amount the trust can distribute to a percentage of the child’s annual income at the time. Another option is that you could set aside assets for special purposes like college, weddings, or buying a house. Trusts are complicated instruments to draft properly, and you need to appoint a trustee, so there could be added expenses.
There are no right answers to these questions, but an estate planning professional can guide you through your options and help you design a plan that will carry out your wishes.