What is the Best Way to Handle an Inheritance for Your Children?
In this day and age it can be hard to know if your child is ready for the sudden windfall that comes when you pass. The world today can make it harder for children to navigate into adulthood and as result it is challenging for parents to measure work ethic, integrity and responsibility. For those that are planning their estate it is key to think about how the children in their life will handle the windfall and if they are ready for it. Here are some thoughts to help you make sure your child is ready.
Give a Small Financial Gift
As of this writing it is okay for an individual to gift another person up to $14,000 without any tax ramifications. Consider giving each of your children a financial gift without any strings attached and see how they handle it. Do they save it, pay down debt, make an investment, seek advice or spend it all on material items? These small gifts can shed a great deal of insight into how prepared your child is for a future financial windfall. This can be an opportunity for you to provide guidance and instruction.
Incentive Based Trusts
While this option may not seem appealing and does require more work in the set up as well, it can provide the safeguards that a child may need if they have not proven that they are able to handle a large sum of money. The trust could be set up to distribute funds for the child when they have reached certain life benchmarks. For example, an incentive could be connected to graduating from college, pursuing a Master's program, starting a business, purchasing a home or maintaining gainful employment for a certain number of years. These steps can help ensure that a child is not overwhelmed by receiving such a large amount of money at one time. An additional bonus of this strategy is that children can live without the burden that comes with that large sum of money. Some children lose all ambition and simply live off the inheritance, while others become paralyzed with fear of doing the wrong thing with the money. These reactions can be avoided with a incentive based trust and help the child continue to work towards bettering themselves.
Pay Down a Loan
Another strategy to help your children at the time of inheritance when you are not sure if they are financially ready to handle the financial responsibility is pay down a loan that they have. Paying for college and buying a home is much more expensive than it used to and a financial gift of paying down a loan balance can drastically help the child without putting additional money in their pockets. This could be a way to help your child without giving them the money and the pressure that can come with it.
For an adult who has worked hard throughout their life to build a nice nest egg the last thing you want to worry about is if your children are ready for the responsibility of taking care of it. Every parent hopes that their child is ready to handle an inheritance with great care and respect however, not every child may be ready. By following the ideas above in this post you can start to work on some solutions to help navigate the issue. Setting up the proper estate plan is vital for any adult that has some inheritance to pass onto their children. Consider working with a Tacoma attorney firm that is experienced in setting up estate plans and values the needs of the client. We can help you become aware of all of the options you have as an individual.