Recently I wrote about managing sudden wealth – namely, an inheritance. While not everyone will be the heir to a sizable estate or be lucky enough to hit the lottery, many ARE planning to leave THEIR estate behind for loved ones. Many of my clients want to leave money to their kids. But a good portion of them have also expressed concerns, that their children may be ill-equipped to manage sudden wealth.
It seems to be a more and more common narrative. Some worry that providing too much wealth will rob their children of the ambition and hard work it took to amass the wealth. Others worry that the money will burn a hole in their child’s pocket, wasting valuable resources on frivolous things.
Here are some strategies to consider, that don’t include just sitting idle and hoping your children have a sudden flash of financial acumen by the time you pass away.
- Give your kids a financial test. Gifting laws allow you to gift $14,000 per year to any individual without any gift tax consequence. There aren’t any rules or restrictions to this type of gift. See how they handle $14,000 before letting them inherit a number with more zeros at the end. Do they save it? Pay off debt? Spend it? Do they ask for help?
- Give non-cash gifts. What’s to stop you from helping your children while you’re alive, without putting the pressure on THEM to make the smart financial decision? Instead of giving cash gifts, help pay down student loans or reduce a mortgage.
- Tie distributions to ages and events. If you are concerned that your children aren’t financially mature enough yet, draft a trust where they can receive portions of the inheritance as they age. It’s common to set age thresholds for principle distribution, or to offer income payments at first, followed by lump sums for major events in life (graduations, home purchase, etc.).
- Use an incentive trust. If the primary concern is that an inheritance would rob their children of working initiative, clients could draft language that rewards earnings. For example, Jane’s $75,000 per year job could be supplemented dollar for dollar from the trust. While Jonny’s focus on playing video games has him making only $22,000 per year so he’s only matched with $22,000 from the trust. (There could also be stipulations that reward for serving/working in non-profit fields).
You know your heirs, their strengths and weaknesses. Be creative, but do the necessary planning to ensure your objectives are met. Money can be a tool that enriches the lives of your loved ones. Just be sure to talk to your financial advisor and estate attorney first.