Sometimes, it’s hard work just to pay the bills. If you have been able to build up any kind of wealth to leave to your children (or anyone else that you care about, for that matter), chances are, you have worked hard to build up that wealth. It’s also safe to say that your intention with leaving an inheritance for someone is to help them, not to hurt them. There are a number of mistakes that heirs commonly make, and doing a bit of thoughtful planning now may help to prevent, or at least lessen the blow, of those mistakes.
Mistake #1: Careless Spending.
On average, inheritances, regardless of their size, are gone within five years. Beneficiaries who have been of modest means are particularly vulnerable to “Sudden Money Syndrome,” seeing the inheritance as “found money” and changing their spending habits accordingly. What may have taken you a lifetime to accumulate could be squandered in no time. And then what is the beneficiary left with? Guilt and shame for making foolish choices, and perhaps more debt as a result of careless spending and leveraging of newly-acquired assets.
Mistake #2: Good Decisions, Derailed.
Another mistake that may be made by young adult beneficiaries who receive a large lump sum of money is to drop out of college to travel and enjoy life with their newly-found wealth. When the money is gone, however, they are likely left worse off than if they had never received it.
How can you help your heirs and ensure, as much as possible, that the wealth you worked so hard to build is a blessing and not a curse? In most cases, having a living trust is the best solution. Using a trust, you will have more flexibility and control over the distribution of your estate than if you had only a will (or nothing at all). To keep a beneficiary from squandering their full inheritance, you may want to consider holding the money back and having the trustee dole it out over time, e.g., 1/3 at your death, 1/3 five years later, and the balance five years after that. If you have young adult beneficiaries, you may also want to incentivize that they finish college by instructing the trustee to pay for whatever they need while they are in school, but not making any outright distributions until they have a degree. You can also incentivize or mandate certain practices before an inheritance will be distributed. A few of the common practices that people mandate (or encourage) in their trusts include:
- Beneficiariy must establish their own estate plan prior to inheriting, to maintain the inheritance as the beneficiary’s sole and separate property (therefore the inheritance will not be subject to split in a divorce proceeding, in the event the beneficiary ever marries and later divorces).
- Beneficiary must attend a money management class prior to receipt of the first trust distribution, to acquire some tools for responsible money management.
- If the trustee suspects the beneficiary has a substance abuse problem, the beneficiary must submit to testing for controlled substances and test clean prior to inheriting.
In order to safeguard your beneficiaries and protect the wealth you have worked hard to build, you should consider employing some of the practices detailed above. You have the ability now to do a bit of strategic planning, to protect your beneficiaries from the costly mistakes that many beneficiaries make.