One of the biggest concerns among parents planning to distribute large sums of wealth to their children is in how they will manage the money. Will the sudden inheritance quash their drive? What if they gamble the funds away? Or worse, what if they become involved in poor investment deals and end up with dried up inheritances and even in debt?
These are common questions, and even some inheritors are fearful they may be inclined to sit on the couch watching sitcom reruns than go out and build a business or make an impact. The good news is, like most things, solid preventative steps can assist adult children with proper inheritance management, so everyone wins in the end.
1. Create Incentives
Rather than just allocate a specific sum to go to an heir, consider setting up incentive tiers. For example, the trustee may be instructed to disperse $15,000 upon attainment of a Bachelor’s Degree while another $30,000 may be dispersed upon attainment of a Professional or Doctoral Degree. While the degrees themselves are not necessarily indicative of the adult child’s income stream, they do reflect a level of ambition and drive that may warrant such rewards. Also, the dispersed sums will help the adult children in paying off student debt, or, at least in creating a safety net as they build their professional careers.
2. Match Inheritance Distributions to Income
Consider matching inheritance distributions to income. If one adult child makes $50,000 a year, the trustee will disperse $50,000. If another child, conversely, isn’t so driven and only pulls in $20,000 a year, the trustee will disperse $20,000. This way, adult children are incentivized to keep working hard rather than await inheritance distributions “just because.” But what if the adult child is an activist and unable to pull in much money? For adult children wishing to work on a nonprofit or some other social-impact cause, you can add language ensuring appropriate distributions for these types of scenarios.
3. Involve Adult Children in a Personal Foundation
If you have a private charitable foundation, involving children from an early age is a fantastic way to teach them the importance of purpose, giving back, and money management. By allowing children to see the difference wealth can have on others first hand, you can grow their sense of responsibility—not just for matters concerning the foundation, but also in their future adult lives.
4. Tie Distributions to Ages and Events
Think back to your late teens or early twenties. Would you have been emotionally and intellectually prepared to receive a large inheritance? The answer is likely no. Many parents opt to create their trust so their kids receive a small increase in their inheritance each year, to ensure proper sophistication and mental preparation to receive larger sums of money.
By taking preventative measures to prepare your adult children for your inheritance, you create an optimal situation for everyone. Consulting with an experienced estate planning attorney familiar with the technical and emotional aspects of estate planning is a crucial first step to success.