Much of family wealth is lost when it is passed from the first to the second generation, with nearly all of it exhausted by the third generation. Even though some of that may be due to most estates not being that large and the bulk of money going to purchasing a home or providing education — often the reason is that young heirs are unprepared to handle an inheritance.
In consideration of leaving an inheritance to their kids, nearly 60% of parents today believe their children are not well prepared to handle a financial inheritance, according to a study by U.S. Trust.
How would your son or daughter react to a large outright inheritance? Although most kids do not actually buy a Ferrari, many are unprepared to receive a large sum of money outright as a young adult.
Limitations of a Will
Outright inheritance is one of the limitations of Will-based estate planning. If you have a Will alone, it allows for lump-sum or outright distributions to your beneficiaries only. It does not allow you to stagger inheritances to your children upon reaching a certain age or attaining certain milestones in their lives (e.g., graduating college, marriage, etc.). A Will also offers zero asset protection.
Setting up a Trust
Many parents choose not to distribute inheritances outright, and instead keep the money in a trust for their children. A trust is a legal mechanism set up to hold assets on behalf of beneficiaries and to transfer the wealth in a specific manner over a pre-determined time. It can help preserve wealth and allow it to grow, while still providing a benefit to your children.
Trusts allow you to hold and pass on property and assets to beneficiaries as you dictate. Most parents want to leave their children enough that they can do anything they want, but not so much that they will do nothing at all.
The key to creating a trust is to balance fund conservation with incentives for children to develop into fully developed adults. The trust can make annual income distributions to beneficiaries and can also make larger distributions of principal at certain ages. For example, half of the trust’s principal could be distributed to your child at age 30 and the remaining trust principal at age 40.
Trusts Offer Asset Protection
As part of setting up a trust, you would need to designate a trustee to manage it. Your trustee would make periodic distributions based on guidelines you provide, although assets that stay in the trust remain protected from irresponsible spending, creditors (i.e., bankruptcy and divorce), and predators (those with undue influence on your child). For example:
- You have a child who is irresponsible with money or has a gambling or drug dependency.
- You are concerned that your daughter’s marriage might end in divorce, and you do not want her ex-husband to receive part of the inheritance in the divorce settlement.
- Your child is easily influenced by others who may encourage irresponsible spending.
Leaving an inheritance to your kids requires sound planning. Every family is unique and presents its own set of circumstances. Even if you don’t have the kid that will buy a fancy sports car, with guidance from an experienced estate planning attorney, you can gain peace of mind about leaving an inheritance to your kids while preserving your legacy and protecting the interests your children. Contact Socius Law Firm today to learn more about Trust-based planning at 508-870-5759.