One very important aspect of estate planning for many parents includes passing their inheritance to their children. Deciding how much inheritance to give your kids can be a difficult task, especially since many parents are unsure of how their children will manage their inheritance after they pass away.
A new study found that almost 60 percent of parents thought their kids were not prepared to manage financial inheritance from their estate plans. This seems to be a significant worry for parents passing on family wealth so what can parents do to help their heirs handle their inheritance?
One of the best ways to help your heirs manage their inheritance is by creating a trust. A trust can keep your wealth safe and protected from creditors and mismanagement because it is a legal document that holds onto assets on behalf of your beneficiaries and will transfer wealth based on certain conditions and predeterminations.
A trust can help parents make sure their children don’t receive all of their inheritance at once and end up spending all of it within the year. A trust protects the assets from being carelessly used, and if you adult kids ever get divorced, those assets will be protected from being split in their divorce.
Parents will want to think about how to balance the funds of the trust to make sure their kids are taken care of but still have funds leftover as they age. One structure that works for many parents is to have a trust that receives income generated from the trust and is still able to transfer parts of the principle wealth in the trust over 10 or 15 years. Many trusts stipulate that these funds must be used for education, health and support and not for other unnecessary expenses like a fancy car.
Some parents also put stipulations like passing a drug or alcohol test before they can receive the funds to make sure a child’s drug or alcohol habit isn’t being supported by their inheritance.
Passing on wealth to future generations can be challenging as you don’t want your wealth to just disappear as soon as it is distributed. That is why it is important to think about how a trust can help distribute your wealth in the best way for your family.
Source: The Fiscal Times, “Trust Your Heirs Not to Squander Your Estate,” Eric Sherman, Nov. 29, 2013