Tools for Protecting Your Heirs From Blowing Their Inheritance
A common concern when estate planning is making sure that your heirs are equipped to manage any assets that come their way. So how can you be sure that if you die before your children, minor or not, they won’t blow through any inheritance they receive? Grim as it may be, this is a concern that should be addressed. In a recent U.S. Trust, Bank of America Private Wealth Management survey, two-thirds of respondents were not sure if their children would act responsibly with their inheritance and thought they could use financial literacy help. Here are a few estate planning strategies we recommend, from education to utilizing different types of trusts, to help keep your children protected.
You might want to transfer your assets while you’re still alive, in order to reduce estate taxes. Putting the funds in a trust is a good option, because you can control, to a point, how and when income is distributed to your children. With this option, you can specify in your will when and how your children can access the funds, and even have it set up with an incremental access schedule, as detailed below. You can change the terms at any point while you are capable of doing so.
Unlike a revocable trust, you cannot change the terms of an irrevocable trust, but you have greater tax protection. Still, with a trust, you’ll be able to determine when and how your children will receive their inheritance. Examples of this could include, “Ten percent upon turning 18-years-old, thirty percent upon turning 25-years-old, thirty percent upon turning 30-years-old and another thirty percent at 35-years-old.”
This option gives you the most control, while still giving your children assets. You can loan your child money for a specific use, or put it in a trust. The tax rates are extremely low, so it’s a great way to help your child kick off their new business or try their hand at investing. You can also adapt payment terms if needed. Intrafamily loans give your child a head start in business or life, while still allowing them to accrue wealth on their own.
GRATs, or grantor-retained-annuity trusts, are usually used with a single stock concentration or another undiversified holding. As the grantor, you can fund the trust with assets for a specific amount of time. During that time, the assets pass on to your children without gift-taxes. After that time, you can specify that the leftover assets be held in a trust.
Of course, one of the best ways to ensure your children will handle their inheritance responsibly is to talk to them about it. Speak to them openly about money and discuss financial literacy. The U.S. Trust offers great learning materials to help. Start at a young age, if possible, teaching your kids to budget their allowance. You could start an investment account when your kids are older too, allowing your children to make investment decisions with your assistance. With a strong understanding of how finances work, your kids are much less likely to blow through the inheritance you worked so hard to give them.
If the potential that your children will spend all of their inheritance in one place is something you worry about too, we can help set up your estate plan with a few measures to protect your children’s finances for years to come. These strategies, from education to utilizing different types of trusts, will keep your children protected. Contact us to learn more.