Once your children (and other beneficiaries) are adults, you have many options for giving them their inheritances. You’ll first need to decide how much you want each one to receive and then when you want them to receive it. Keep in mind that your beneficiaries and their circumstances are different—and what may be right for one is not necessarily right for another.
How Much Do You Want Each to Receive?
Most parents want to treat their children fairly. This may mean giving each an equal share or it may mean giving more to one child than to another. For example, you may want to give more to a son who is a teacher than to a daughter who is a doctor. You may want to compensate a son or daughter who takes care of you during an illness or your last years. Or, instead of leaving a family business to all of your children, you may want to leave it to the one who has taken an active role in the business, then compensate the others with life insurance proceeds and/or other assets.
Some parents worry about leaving their children with too much money. They want their children to have enough that they can do anything they want, but not so much that they will do nothing! If this concerns you, just remember that no one said you have to leave everything you own to your children. In fact, you may decide it would be better not to give them anything at all—and keep the assets in trust for your grandchildren and future generations, set up a family foundation, and/or make a generous contribution to a favorite charity.
When Do You Want Them to Receive Their Inheritances?
Next, you need to decide when you want them to receive their inheritances. Let’s look at some commonly used options.
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If you can afford it, you may want to consider giving your beneficiaries some of their inheritance now, while you are living. Of course, you must take care of yourself first. Most people want to make sure they first have enough to last for as long as they live. And if they are married, they want to make sure there is enough to provide for the surviving spouse. As a result, most people typically hold onto all of their assets until the second spouse dies.
But with people living longer, this approach doesn’t work as well as it used to. It’s not unusual for parents to be in their 90s when they die, which means their children may be in their 70s when they inherit. If the surviving spouse is much younger (for example, if this is a second marriage), the kids may never see their inheritances.
If you can afford to give your beneficiaries some of their inheritances now, you will experience the joy of seeing the results—of seeing your children buy a home or start a business, or seeing your grandchildren go to college—and knowing it may not have happened without your help.
You may also have a child who wants to do worthwhile, but low-paying (even non-paying) work like teach, be a full-time volunteer, or even be able to stay at home to raise your grandchildren. You could provide them with additional income now so they could afford to do it.
Just remember, never give away more than you can afford.
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You could distribute all of your assets to your beneficiaries in one lump sum as soon as possible after you die. This is a very common method of distribution. If your beneficiaries are responsible adults, this may be a good choice, especially if they are older and you are concerned that they may not have many years left to enjoy the inheritance.
However, keep in mind that once a beneficiary has possession of the assets, he/she could lose them. A creditor could seize the assets for payment of debts or settlement of a lawsuit. An ex-spouse could end up with a good portion (or even all) of the inheritance through a divorce settlement. Even a current spouse can have access to assets that are placed in a joint account or if your beneficiary later adds his/her spouse as a co-owner.
If it bothers you that a son- or daughter-in-law could end up with your assets, or that a creditor could seize them, a lump sum distribution may not be the right option. If you want to be sure your assets stay in the family, you may want to consider installments or even keeping the assets in a trust.
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Many people prefer to give their beneficiaries more than one opportunity to invest or use their inheritances wisely, which doesn’t always happen the first time around. So, instead of giving their beneficiaries their inheritances all at one time, they give it to them in installments.
Using the installment method also provides some protection against creditors, even an ex-spouse. They can only have access to assets that the beneficiary has actually received. So, in most cases, they would not be able to access the assets that are still in the trust. (However, if your beneficiary is not paying child support or spousal support as ordered by a court, in some states trust assets can be used to pay these obligations.)
Installments can be done just about any way you wish. Here are some you could consider.
At Certain Intervals: One way is to have your trust distribute portions of the inheritance at certain intervals after you die. For example, one-third when you die; another third, five years later; and the final third, five years after that. (If you are married, you may want distributions to begin after both you and your spouse have died.)
Just make sure you review this part of your trust from time to time to see if it still works for your situation. Depending on how old your children are at any given time, and how long you live, you may not want to make them wait for years after you die before they receive the full inheritance. There’s the chance they may not live long enough to receive all of it.
At Certain Ages: As an alternative, installments could be distributed after you die as a beneficiary reaches certain ages—for example, the first installment at age 25, a second at age 30, a third at age 35, etc.
Again, if you choose this option, make sure you review your trust periodically. Otherwise, your beneficiaries could have already passed those ages by the time you die and would receive their inheritances in one lump sum, defeating your intention of distributing it in installments. To prevent this, your trust can specify that if your beneficiaries have passed these ages when you die, the inheritance would then be paid in installments every so many years (as above).
At Certain Occasions: Be careful about linking the distributions to certain milestones like marriage, birth of a child, etc. It could be that your beneficiary doesn’t marry or have children. (This could also encourage an insincere marriage, and part of the inheritance could end up outside the family.)
Using graduation from college as a distribution time can also present some potential problems. For example, how would you define “college?” Two-year, four-year, trade school? What if a beneficiary pursues a career (performing arts, a trade, etc.) for which a college degree isn’t necessary?
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You may decide to keep assets in the trust and provide for a beneficiary, but not actually give the assets to him or her. Here are some situations with which you may be able to identify.
An Irresponsible Beneficiary: If you feel a beneficiary is too irresponsible to receive outright control of his/her inheritance (or has a problem with drugs, alcohol, gambling, etc.), you can specify that the inheritance remain “in trust” for his/her lifetime or until he/she reaches a more mature age.
The trustee will manage and invest the inheritance, and provide for the beneficiary’s basic needs as you instruct. If you don’t think your beneficiary is responsible enough to receive a regular income from the trust, the trustee can pay rent and other expenses directly so the beneficiary never actually has the money.
Give some thought to your choice as trustee. A family member acting alone may be too sympathetic and easily swayed—or just the opposite. You may want to have a corporate trustee (bank, trust company or independent professional) be a co-trustee to add some objectivity and share the responsibility. You’ll also need to specify who will receive any remaining inheritance if the beneficiary dies before receiving the full amount of the inheritance.
You may also want the trust to include a spendthrift clause to protect the trust assets from creditors. Generally, this says that the beneficiary cannot voluntarily spend any trust assets or income before they are paid to him/her. So if, for example, your irresponsible son or daughter buys an expensive sports car, the trust cannot be held responsible for payment.
Protection from Creditors/Spouse: As mentioned earlier, if you are concerned that a son- or daughter-in-law or a creditor could have access to the inheritance, you may want to keep the assets in trust and just provide periodic income to your beneficiary.
Incentive to Work: Maybe you want to give a beneficiary a little extra incentive to work and lead a productive life. For example, one father was concerned that his beach-loving son would continue to simply ride the waves while he waited around for Dad to die. The son saw no reason to seek regular employment because he knew he would receive a sizeable inheritance when Dad died. To encourage his son to be more productive, Dad arranged for the inheritance to stay in trust. And for every dollar the son earned on his own, the trust would match it.
Note: If you decide to income-match, make sure your trust will provide for your beneficiary if he/she is unable to work due to illness or injury. And don’t forget about retirement. Do you want your beneficiary to work for as long as he/she lives in order to receive an income from the trust?
Beneficiary Doesn’t Need the Money: You may have a child who is already financially secure and doesn’t really need the money. Instead of giving the inheritance to this child, you could keep the assets in trust for your grandchildren and future generations. You can still provide periodic income to your child and have the assets available as a safety net should circumstances change (due to illness or injury, divorce, death of a spouse, investment loss, job loss, etc.), and he/she needs some money.
Loved One with Special Needs: You may have a spouse, child, sibling, parent, or other loved one who is disabled or may simply not be able to handle an inheritance by him/herself after you die. This is a perfect time to keep the inheritance in trust and have the trustee provide for this person as you would. (This is another good time to consider a professional trustee.) See “Providing for a Loved One with Special Needs.”