4 Things to Consider When Planning Your Child's Inheritance
If you have money to leave for your children after your death, you need to know the best way to go about leaving this inheritance. Some people just assume that all assets will be easily dispersed to living relatives by the state after death, but this isn't necessarily the case. You may not know how your children will handle the money and what kinds of obstacles they will face. Here are some things you need to consider when planning inheritances for your children.
1. The readiness of the beneficiaries.
You don't know when you're going to die, and if you pass while your children are still minors or young adults, there's a chance your carefully saved wealth will be squandered with poor money-management practices. If you're concerned this could be the case, it's best to set up a trust for the inheritance instead of a will. You can set terms to the trust that allows the money to be released slowly to your child over time or when they hit certain milestones in life.
2. Not planning for estate tax.
After death, the remaining assets that are passed to your children can be taxed. With some careful planning, you can avoid this heavy taxation on your estate that will substantially deplete it. You can plan for this by doing the following things.
Gifting money from the estate to many different beneficiaries. You can give up to $14,000 dollars tax free, so if you are in the position to do so, you will want to disburse these funds before your death to as many people as you are hoping will benefit, including your children.
Putting some assets into irrevocable trusts. Irrevocable trusts allow you to put assets into the trust, and over time those assets are no longer included in your estate—they're owned by the trust. You can then plan for the trust to be dispersed to the heirs. While these trusts can be complex, they are a good method for passing on a family home without burdening your children with a heavy tax debt.
Benefit trusts. These allow one spouse to put money into a trust for the use of the other spouse. Upon your death, the money in the trust is no longer part of your estate, but it is still in the family, and your spouse is able to move the inheritance to the heirs.
3. Set up incentives.
Some parents worry that with inherited wealth, their heirs won't have the drive to work hard and establish their own financial security. This can be true, but you can also plan to make this type of scenario less common. With a trust, you can set the terms of inheritance. If you make the trust into an incentive, you will leave your wealth to your child while still making them work to receive it. For example, you might allow the fund to be dispersed from the trust only after your child has saved $50,000 of their own money, earned a college degree, or done humanitarian work. You could also allow your child to only pull money from the trust to match what they earn.
4. Use money indirectly.
Sometimes, parents like to see money go to good use. If you are concerned about how the funds would be used and want to have more control over it, explain how the money is to be applied. For example, some parents would like to see inheritance dollars used to pay off a mortgage or student-loan debt instead of used on a fancy car or expensive traveling trips. Your child may never see the dollars in the bank account, but they will still benefit hugely from the inheritance as it is applied responsibly by the terms of the trust.
For additional info, talk to an attorney who focuses on estate planning.