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How to Create An Inheritance Plan With Your Parents

Long term financial planning is not an easy task. You have to consider a myriad of potential setbacks, changes and opportunities that will arise over an extended time period. It can be exhausting to map out your plans, but still more draining to do what you need to do when sticking to those plans. how to create an inheritance plan with your parents

Fortunately, once your plans are set you can put them out of your mind unless there is a major life transition. It’s those transitions that are the hardest to plan for financially.

For example, discussing financial plans for long term care and end-of-life transitions for your parents is a difficult conversation. However, it’s one that needs to be had to ensure peace of mind and peace in the family in the event of their death.

Inheritance, Estate and Long Term Care Planning Matter

One of the most challenging long term financial planning chores you can undertake is helping older parents or family members develop a sound estate plan. In particular for their care when they are no longer able to be independent, and creating a plan for their assets when they pass on. 

Learn more about the changes caused by the SECURE Act. Find out what the new regulations did to open 6 estate planning "wormholes" in our downloadable PDF.

Like all long term financial plans, once you’ve got the plan in place you can rest easy, updates aside, knowing that your parents are prepared for the day when they need to make that transition. The hardest part, though, is starting the discussion.

Why Talking About Inheritance/Estate Plans Is Difficult

The immediate concern for most people with aging parents is actually bringing up the topic of their estate plans and if or how an inheritance will be distributed among family, friends and their favorite charitable causes. No one likes to discuss their own mortality, and no son or daughter finds it pleasant to discuss their parents’ end-of-life plans either.

Perhaps this is because many adults feel like discussing inheritance with their parents can only be portrayed as grasping, greedy or selfish. The reality is that all family members should be involved in the inheritance planning process. It’s the best possible way to have an amicable outcome and peaceful transition when the day arrives to put those plans into action. 

So how do you go about this delicate process without creating family turmoil? Let’s take a look at some tried-and-true methods for inheritance planning as a family. We’ll also review how to make arrangements for other long term financial concerns for your parents as well. 

Gathering Information: Asking The Right Questions

It’s important to go into this conversation and planning process with no assumptions about what plans your parents do or do not have in place. Here are some good questions to get you started:


What estate planning have you done already?

Regardless of your parents’ financial standing, you need to open the discussion by asking what estate planning they already have in place. Asking about a will, trusts, existing accounts with named beneficiaries, and joint accounts with survivorship rights that may have been set up prior to your conversation. This question is essentially asking to be “read in” on what planning they’ve already put in place. 

Asking this question is the first step in gaining and understanding what will happen to an inheritance (if any) as well as other assets after they pass. Even if you aren’t executor of their estate, at least you’ll gain some insight into their plans. 

This insight can go a long way to eliminating surprises and alleviating misunderstandings that can cause ugly family disputes. At a time when everyone’s emotions are already running high, every bit of preparation and foreknowledge matters.

What are your plans for long term or advanced care?

As life expectancy continues to increase, long term care and advanced care are becoming critical components of planning an estate and developing an inheritance plan. Should your parents become unable to live independently or be incapacitated, their undeclared final wishes, care and medical costs can become a serious financial and emotional burden. 

Part of developing an inheritance plan and an estate plan as a family is considering these costs in advance and ensuring everyone has the best available information and knows what plans are in place. Asking about existing estate and inheritance plans helps everyone in the family manage expectations and eases the transition if long term care plans need to be implemented.

Who will be the executor of their estate and where are the estate documents kept?

Some families prefer to engage a law firm to handle the execution of their will and distribution of inheritance and assets. A neutral third party alleviates any potential hurt feelings among siblings or other relatives. More importantly, it reduces the need to redraw plans should an appointed executor within the family predecease one or both parents. Knowing who to turn to for help with end of life transitions also offers greater peace of mind during what will certainly be a difficult time in everyone’s lives.

The family should also be aware of the contents and location of all estate documents. Hiring a law firm to oversee the estate and inheritance plan makes this easier since the firm will keep copies in their private files. Everyone should also know where parental copies of these documents are as well. The more open everyone is about the terms and particulars of an inheritance plan and estate plan, the less likely it is that conflicts and disputes will occur. 

Developing An Inheritance Plan Together

Once you’ve discussed what plans your parents may have already made, everyone can start working together to develop an inheritance plan that honors their wishes and doesn’t jeopardize the financial situation or obligations of anyone in the family. 

Additionally, if your parents have concerns about how you or other members of the family may cope with sudden wealth, you need to present them with options for leaving an inheritance that won’t derail anyone’s life. Here are some recommended strategies for structuring an inheritance plan that will assuage parental concerns and provide equitable solutions for everyone involved. 

Incremental Disbursement

Some people view this as a sort of test for beneficiaries to ensure they can handle the sudden influx of wealth that often accompanies an inheritance. It also involves paying out funds in advance before either parent is deceased, but it is an excellent way to determine how a large inheritance will affect individuals. 

Learn more about the "domino effect" caused by changes to taxes, trusts, gifting limits and more. Find out what the new regulations did to open 6 estate planning "wormholes" in our downloadable PDF.

Under most state tax codes and Federal tax code, individuals can gift up to $14,000 per year to as many people as they want without incurring gift tax penalties. If your parents are married, they can gift as much as $28,000 per person per year. 

Distributing inheritance incrementally with no rules or restrictions for its use allows parents to observe how each family member handles the money. If you plan on leaving a large inheritance worth millions of dollars, it’s a smart move to see how everyone handles $20,000. 

Financial experts observe most beneficiaries will do one of the following: save the money as a financial safety net, use it to improve their quality of life, ask for help using money wisely or just spend it. This will confirm or dispel any doubts they may have about leaving an inheritance causing more harm than good.

Incentive Trusts

Many parents share the concern that leaving a large inheritance for their children can actually sap their ambition and reduce their drive to build a life of their own with their own achievements. To prevent this outcome, many parents set up an incentive trust of some kind. 

There are several strategies that can be applied here, and you should discuss all of them to ensure your parents find one that fits their long term plans. Here’s a quick overview:

“Investment Banker” Trust

The trust uses a form of income matching like a retirement fund. If a beneficiary earns $80,000 in a given year, the trust disburses a matching $80,000 for that year. By the same token, if a beneficiary earns only $30,000 in a year, the trust matches only $30,000. 

Investment Banker trusts make it easy for parents to distribute an inheritance based on who is showing the most drive and determination to achieve success on their own without their inheritance. That money becomes a tangible incentive to keep making a difference with their lives as they build a life of their own.

Many of these trusts also have a built-in clause that provides for children or beneficiaries who choose to make a difference by working for a non-profit like the Peace Corps or Doctors Without Borders. This way no one is left out of their inheritance should they choose a life of public service over a more lucrative career. 

Educational Incentive Trust

For parents who value academic achievement and self-improvement, an educational incentive trust is an excellent solution. These trusts disburse the inheritance based on the level of academic achievement a beneficiary completes. 

Did you just complete a bachelor’s degree? You receive a gift of $20,000 from the inheritance trust. 

Get your master’s degree or doctorate? The trust pays out $40,000. 

College degrees and education are not necessarily a direct indicator of future success, but it does reward family members for pursuing their dreams by furthering their education. An educational incentive trust is a great way to help beneficiaries maintain their drive and ambition while simultaneously rewarding them for it.

Age/Event Tied Distribution Trust

If you take a moment to reflect, would you have been mature enough to manage a small fortune when you were in your twenties? Most of us would have to say no if we’re being completely honest. 

For this reason, many parents choose an age/event distribution for inheritance. The trust pays small amounts that increase as beneficiaries reach specific ages. They also write in distributions to be paid for specific life events like college tuition, down payments for a first home or weddings. 

Financial experts recommend distributing income from an age/event tied distribution trust when beneficiaries are young, and then transfer the principal amount of the inheritance when beneficiaries are older. Waiting until everyone is more mature and hopefully financially wiser with an established career can preserve ambition and ensure an inheritance can have the greatest possible positive impact.


Establish A Family Charitable Foundation 

Creating your own family charitable foundation has multiple benefits that will not only create a lasting impact on beneficiaries, but also the world. First, funds paid into this foundation will receive a significant tax deduction. Second, it creates the perfect opportunity to educate the family about wealth management and using your resources to benefit your community and the world. 

The structure of the trust works like this: each year the trust must disburse a set percentage of the principal. Let’s say 5% for the purpose of an example. Each member of the family is responsible for finding a worthy cause and donating 1% of that money to the cause of their choice. 

The trust continues to mature and earn over time, more than replacing the 5% annual mandatory distribution. When the time comes to distribute the principal as an inheritance, all beneficiaries have developed wealth management skills and are practiced in using money to create a lasting impact. If your parents are looking to leave a legacy beyond money, this is an exceptionally smart way to go about it.

Cashless Inheritance

Rather than paying out a large inheritance with tax penalties and money management concerns, parents can choose to use their annual gift giving exclusion to directly pay for long term expenses which directly benefit their children. For example, they can use these gifts to pay down the principal of home loans or student loans. 

Learn how your spouse and heirs could have been negatively impacted if your estate plan hasn't been updated to reflect the new laws. Find out what the new regulations did to open 6 estate planning "wormholes" in our downloadable PDF.

Given how much these costs have increased over the past several decades, paying down their balances can provide financial stability and independence without ever needing to put cash into anyone’s hands. One caveat: double check to make sure that there are no prepayment penalties, early repayment costs or other negative financial consequences for whatever you decide to help pay down. 

Final Thoughts

Talking about inheritance and estate planning with your parents is an essential and necessary part of keeping peace in the family and preparing everyone for the inevitable when it arrives. Mortality and money are uncomfortable topics for families, but approaching inheritance plans as an essential component of long term financial planning is crucial.

It’s something the whole family should create together that goes a long way towards peace of mind when your parents are no longer with you. Make the meeting happen, even if it’s just to get more information so you’re prepared when that day arrives. Everyone in the family will be glad they did.

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About the Author

Aurtho Clint Haynes, CFPThis article was written by Clint Haynes, CFP®. Clint is a Certified Financial Planner® and Founder of NextGen Wealth. You can learn more about Clint by reading his full bio here.