What kind of legacy are you going to leave when you die? If you haven’t pondered that question yet, now is the perfect time to start. If you have money or any property that you want to pass on, it’s well past time to get a plan in place for when the inevitable happens.
However, when it comes to estate and legacy planning, you will want to include your children in this process. It may be tempting to try and figure everything out on your own, but it’s often much better to keep them involved.
So, with that in mind, we want to go over how to create an inheritance plan with your children. We’ll cover a variety of situations and variables too so that you’re prepared for every eventuality.
Although your kids are the ones who will be spending the inheritance, chances are that you’ve thought extensively about how you want them to do so. Realistically, inheritance isn’t meant to be squandered or wasted on frivolous things. If your children plan on going to Vegas to drop all of the money in one shot, is it worth leaving it to them in the first place?
When coming up with these goals, you want to articulate them as much as possible. Perhaps you’ve had some vague idea that the money could be used for education or to start a business, but that can cover a wide range of possibilities.
Do you want your kids to go to a university or a trade school? What if one of your children wants to become a doctor or lawyer? Will the inheritance cover all of that or only a portion?
Write down these goals before talking with your kids about them. Also, remember that what you want for them may not align with what they want for themselves. When talking about how to create an inheritance plan with your children, their input matters too.
The age of your children can affect your legacy planning as well. If, for example, they vary wildly in ages (i.e., the oldest is in his 30s, and the youngest is still a tween), that could impact how money gets distributed. If all of your kids are under 18, then you’ll want to plan for what to do if you die suddenly before they reach legal age.
Another thing to consider with younger children is that their needs and wants will change over time. Right now, your youngest may want to be an astronaut, but in 10 years, he or she might want to become a small business owner.
Overall, your planning should be a little more generic when your kids are under 18. Once they reach adulthood, it’s a little easier to figure out what’s best for them in the long run.
Finally, if you do die before your kids turn 18, you need to be sure that your money and property will be appropriately handled. If you don’t have a will or a trust in place, the state can dictate how and when the funds will be distributed.
Also, different states have varying probate laws, all of which can diminish your inheritance substantially. Be sure to read up on the local regulations regarding estates and probate when drafting a will.
Above all else, you must discuss your legacy plans with your kids. While their input may not impact the final decision, it can alleviate a lot of the stress and in-fighting that could occur otherwise.
For example, perhaps you’re not planning on leaving equal amounts for each child. In that case, those who receive less may not appreciate being left out, and it could create a rift between your kids once you’re gone.
That being said, explaining yourself can seem a bit overwhelming at first. Confrontation can be difficult, which is why so many people avoid it.
However, if you can’t talk to your children directly, we highly recommend leaving some kind of note in your will that outlines your decisions and thought processes. This way, no one is left wondering why funds were disbursed a certain way.
Chances are that your plans and ideas will change multiple times before the time comes. Maybe you’ve earned more money in the last few years, or perhaps one of your kids started making more, meaning that he or she doesn’t need as much of a safety net as the others.
Here are a few options on how to create an inheritance plan with your children.
Trusts are one of the best ways to parcel out money to any beneficiaries. The reason we like trusts so much is that you can control how and when any funds are disbursed. Here are a few examples of trusts you can create.
In this case, the total sum will be distributed among the recipients based on the will of your trustee (the person in charge of the trust). Make sure that you discuss any plans with the trustee beforehand so that he or she can follow your wishes.
A pot trust doesn’t take effect until the youngest child reaches 18 - after which point, all of the money becomes available. If your kids are all around the same age (only a couple of years apart), this option may be beneficial. However, if the youngest is well below the others, it could impact the older generations since they have to wait longer.
One issue that many parents have with large inheritances is that the money can adversely impact the children. For the most part, kids that receive a massive windfall tend to have less drive and ambition. After all, where’s the motivation to work when you have money already in the bank?
Incentive trusts are a way to help alleviate this problem. You can tie disbursements to specific goals or life events. For example, each child gets a portion of the inheritance after completing college.
Or, you can link distributions to a child’s annual earnings. So, if one kid is making six figures, he or she gets the same amount from the trust. In this case, the incentive is to find a higher-paying job to get more money from the inheritance.
Another benefit of inheritance trusts is that you have a lot of flexibility in how the funds are disbursed. However, keep in mind that things can change. For example, if you stipulate that your kids have to attend a university, what happens if one decides to attend culinary school? What happens if one of your kids decides to work for a nonprofit instead of getting a degree?
While incentive trusts can be an excellent way to motivate your children to work hard and achieve personal goals, make sure that you’re not inadvertently shoehorning them into a specific lifestyle. You want your kids to succeed while still allowing for some personal freedom of choice.
In some cases, it may be better to set up a trust for each child specifically, rather than having everyone pull from the same funds. You will have to appoint a trustee for each case, but going this route will give you more control over how much you provide and how it’s disbursed.
For example, with one child, you might decide to distribute the funds at certain ages (i.e., 25, 35, and beyond). With another child, you may prefer to dole out money for specific life events, such as buying a house or getting married.
Typically, money is going to be the primary concern when talking about how to create an inheritance plan with your children. However, chances are that you also have various assets and/or property that you will want to leave as part of your legacy. Here are some considerations when figuring out how to distribute everything.
It might be tempting to leave something like your home to all of your children equally (each one has an equal share of the property). However, that could complicate things down the line.
Let’s say that you left the family home to all three of your kids. One of them wants to sell while the others want to keep it for several years.
What if two of your children want to move in? What if one of your kids can’t afford property taxes and other maintenance costs down the road?
Although it can seem like you’re avoiding the potential of “playing favorites,” the fact is that leaving property or assets to one person is going to eliminate any disputes. This way, the child who inherits the item has full custody and can decide what to do.
When it comes to assets and property, their current value isn’t set in stone. Some items will appreciate over time (like real estate), while others will depreciate (like a car).
You’ll want to keep this in mind when drafting an inheritance plan. Ideally, you’ll get all of your assets and properties regularly appraised so that you can update your will (or trusts) to reflect any changes.
For example, if you’re leaving property to one of your kids in place of money and that property becomes more valuable, you might want to adjust the amounts left to your other kids so that they don’t feel left out.
We’ve covered the basics, but this whole process can be relatively complicated, particularly if there are a lot of variables in play. Here are some other things to think about when coming up with a plan. Don’t get blindsided later on by these potential problems.
Currently, individuals can gift up to $15,000 to a person without incurring taxes. As a couple, you could potentially give your kids up to $30,000 in a single year. If you’re worried about how your children will handle a massive windfall, this could be an excellent litmus test to see how they’d react.
Ideally, you won’t tell them that’s why you’re giving them money since that could influence how they spend it. But, once you see how responsible (or irresponsible) they are with the gift, you can adjust your inheritance plans accordingly. Also, if those plans do change, be sure to make your kids aware of it so that they aren’t surprised later on.
One of the primary issues with retirement planning is that you never know how much you need. Realistically, there will still be money left over when your time comes, which means that it can be passed on to your children. Here are some ways that you can plan for this.
If part of your retirement funds are tied to assets like stocks, then they are subject to capital gains (non IRA and 401k accounts). For example, if you bought shares at $10 each and sold them at $15, you get taxed on the $5 difference.
For inheritance beneficiaries, however, they get a step-up in basis. In this case, the current value of the shares being passed is considered the base price. This means that your beneficiaries will only pay taxes on increases from $15, not the original $10.
In most cases, retirement accounts from an employer pass on to a spouse once you die. However, you can name a non-spousal beneficiary in some cases. With these accounts, there may be age requirements before a recipient can withdraw funds. Also, in most instances, any money coming out of a retirement fund is treated as taxable income.
In non-spousal arrangements, beneficiaries cannot treat the account as their own. This means that they can’t add more money into it or roll it over into a new account. To do this, you have to do a trustee-to-trustee transfer to ensure that the beneficiary has access to the funds.
Finally, if you have money in a Roth IRA, those funds are usually paid out within five years after the original owner’s death. However, they can be spread out based on the beneficiary’s life expectancy.
Overall, when it comes to passing on retirement funds, be sure to talk with your attorney and financial planner in-depth to see all of your options.
Creating an inheritance plan with your children doesn’t have to be complicated. Let our expert team assist you in making the best decisions for everyone involved. From helping you create a will to navigating the world of trusts, we’re here to make sure that your legacy planning goes smoothly.
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This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth. You can learn more about Clint at the website NextGen Wealth.
NextGen Wealth, LLC is a registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, or attorney before implementing any strategy or recommendation discussed herein.
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