Have you ever wondered how much money you “should” leave to your children? This is a common question and point of discussion with many clients when reviewing their Live Well Plan. The most common default answer is to let the children split all of the remaining assets equally but is this always the right answer?
Take a minute to think about your family. If you are like me, your children have different personalities. Our firstborn, Hallie, has red hair and has the personality to back-up the red hair. We always know what is on her mind! Meanwhile, as a contrast, our second daughter, Harper, is a little more reserved. Even though Harper is only 6 months old, it is easy to tell she is going to be more laid back than her older sister. Most children have different personalities, strengths, and also struggles. We love our children equally, but parent them differently. Now fast-forward and assume you and your spouse have passed away at an early age. Because of this, your children will each inherit $2 million.
Would this be a good or bad? Would they foolishly spend some (or all) of this financial windfall over the next few years? Give part of it to charity? Quit their job? Would this stunt their creativity or desire to work? Would they save for retirement or pay down debt? Here's the better question… would you trust each of your children to responsibly handle $2 million dollars tomorrow?
Research shows that without providing education, wisdom and life purpose, the transfer of wealth can be more destructive than productive. How do we help ensure your inheritance plan does not cause more harm than good? There is no ‘one-size-fits-all’ answer to this difficult question as every family is unique. We have helped parents prepare the next generation to receive a future inheritance through education (spaced repetition is key) and mini-family retreats. There must be a systematic plan in place to help each child inherit funds with perspective, wisdom, and common sense. Our goal is to help parents prepare their children to thrive when an inheritance is received.
With your own children in mind, consider these four ideas:
- Give your children a financial ‘quiz’: Under current law (in 2019), each person can gift $15,000 per year to each child/grandchild without any gift tax consequence. If you are married, you and your spouse can give $30,000 to an individual. Make a gift to your child (does not have to be $15,000) with no strings attached and see what they do with the money. Check back in in 6 months and then again in 12 months. What have they done with the money? Have they saved it? Have they spent it? Did they ask for help investing? If you want to see what your children will do with a $2 million dollar inheritance, first see what they will do with a $15,000 gift.
- Consider the use of an incentive trust: The fear of many parents is that too much money would kill the drive and ambition of their child. They fear their children will be robbed of zeal and enthusiasm to make an impact in this world. One consideration for parents with this concern is to create an incentive trust. This just means that there are stipulations built inside of the trust rather than leaving an inheritance outright. The incentives can be as creative as you would like. For example, the trust could only distribute funds which match the child’s salary. If John makes $90,000 from his job, the trust will match and distribute $90,000 that year. But what if your child is not driven by money and wants to work for a non-profit? You can build-in a clause to help ensure distributions are paid to the child assuming he/she is living a productive life. There is great flexibility available in designing an inheritance plan that best fits each of your children and grandchildren.
- Stagger trust distributions to specific ages: Statistically, a 40 year old is going to be more financially mature than a 35 year old. A 35 year old will be more mature than a 30 year old. How old will your children be when they inherit money? Obviously, no one knows the exact answer to that question. Because of this, many parents will create a trust so their children will receive a small amount of money each year and the bulk of the inheritance when they reach a certain age (e.g. 1/3 at age 30, 1/3 at age 35, and the remainder at age 40). You can allow important expenses (e.g. medical expenses, education costs, etc.) to be covered prior to the year they receive the bulk of the inheritance. Another popular strategy is to distribute only income from a trust when your children are younger and distribute principal when your children are older, have a career and more financial experience.
- Give to your children now without gifting them cash: One of our favorite ways for parents to consider giving to the next generation is by paying down debt. This can be done before your children receive an inheritance or it can be written into your estate plans. For example, you can use funds to pay down your child’s mortgage principal or school loans. This can make a significant difference to the child’s financial future, while not putting cash in their hands today. Many parents realize that mortgages and school loans are substantially higher now than they were in their time, so helping reduce that burden can be a rewarding proposition. Also, many parents will gift to a college savings fund for their grandchildren to reduce future expenses for their children and to ensure the grandchild has ample funds to attend the college they desire.
Takeaway
As a parent, we all want what is best for our children. It is natural to worry about how your children will respond with a large financial windfall. With some thoughtful family planning, you can use your money as a tool to enrich your children’s life rather than drag them down. Want to discuss your family dynamic in more detail? We have helped hundreds of families walk through this process.
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Matt Price serves as a Partner and Senior Vice President for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their two daughters and their family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 9 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes that everyone needs a wealth coach!
Opinions expressed here are those of The Price Group and not necessarily Raymond James. Any information is not a complete summary or statement of all available data necessary for making a decision and does not constitute a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the legal provisions of the issues presented herein, Raymond James and its advisors do not provide legal advice. You should consult with a legal professional in regards to your specific situation.