5 Ways to Keep Kids From Blowing Inheritance
“I’m not leaving my kids anything.”
I wasn’t expecting to hear that from Tom, but I completely understood his point of view.
“I don’t want them to waste all of my money, become lazy, and never amount to anything in their lives,” he said. “I want my kids to have the same kind of work ethic I do, and I think knowing that you’ve got a big inheritance coming, or actually receiving it, is a recipe for disaster.”
“What if I could give you some inside estate planning attorney tips to help ease your pain?” I said.
“Give it your best shot,” Tom said.
I figured, because I like you, that I wouldn’t limit this information to Tom’s ears only. The fact is, whether your net worth is $100,000 or $100,000,000, these tips will help you give your kids a solid foundation for handling their inheritance.
1. Give Your Kids a Super Secret Money Pop Quiz
As of today (2016) you have the ability to gift away $14,000 a year to as many people as you want, tax free. If you are married, both of you have the ability to do this.
The super secret money quiz is pretty simple. Give your kids their 2016 gift and see what happens.
Don’t put any restrictions on what they can do, but, and this is because you want them to actually use the money wisely, let them know that if they are interested, you have some ideas for what to do with the money to maximize its usefulness.
Then, just sit back and see what happens.
NOTE: if you give this super secret pop quiz you can’t get mad at your kids for what they do with the money. If they blow it all in Vegas that’s okay. If they tuck it all away that’s okay.
The key here is remember that this is a learning experience for you. If you’ve got a kid that’s really responsible, then that’s great, plan accordingly. If you’ve got a kid that’s not, then that’s great too, just plan accordingly.
2. Use Estate Planning Tools to Create Incentives.
Maybe you don’t need to do the test. It’s not going to help you because you’re never going to really know what your kids are going to do when a huge stack of cash is placed in front of them.
You want a little more certainly that they won’t end up on instagram posting yacht pictures and $10,000 dinner receipts. I get that.
If you decide you actually want some control over your money after you’re gone I have good news – it is more than possible.
In this specific instance what I’m talking about is an incentive trust.
An incentive trust is exactly what it sounds like – it is a trust you create that pays out to your kids if they reach certain milestones.
Think of it as a bonus structure for life for your kids.
Here are some common incentive trust structures.
“Investment Banker” Incentive Trust Clause
This incentive is pretty straight forward – the trust is to be distributed based on the salary of your kid.
If Johnny is making $75,000 a year he gets $75,000 a year.
If he’s making $5,000 a year, he gets $5,000.
But what if Johnny decides he wants to save the world? There’s an incentive for that too.
“Save the World” Incentive Trust Clause
We all know that money isn’t the end all be all of life. Money, at best, is a scorecard.
There are plenty of people out there making outstanding contributions to the world that aren’t making a lot of money. There’s a lot of honor in that.
If you want to leave the door open for Johnny to save the world simply include the “save the world” clause in your incentive trust. If Johnny joins a nonprofit he still gets a distribution.
“Educational” Incentive Trust Clause
Is it a priority for your kids to go to school? Then give them an incentive to get their degree.
A common example of something like this is “you get $10,000 for a bachelor’s degree, $20,000 for a master’s degree.”
We all know the education isn’t in the classroom when it comes to college and graduate school.
The network you build and the lessons you learn are often worth the price of the actual “education.” If you want to help make higher education a priority for your kids, add this clause in.
Oh, and by the way, any excellent estate planning attorney, like all of us here at DC Legal, could help you with this.
3. “Drip” Distributions
When I was 20 I was in college. I had a fake I.D. I was going to parties. I was in a fraternity. I was chasing girls. I was getting good grades (hey, I’m a lawyer – I always got good grades!). I thought I knew it all.
I would not have been prepared to have a substantial amount of money dropped in my lap.
Now I’m 36. I’ve got two (soon to be three) kids. I’ve got a mortgage. I’ve got bigger dreams for what I want my life and legacy to be.
I could handle a substantial amount of money dropped in my lap today.
If you believe your children will mature as they become older (as most people do) then consider “dripping” your distributions over time based on their ages and events.
Get married? Distribution.
Turn 30? Distribution.
Have a kid? Distribution.
Want to buy a house? Distribution (for the down payment).
And on and on.
4. Create Your Legacy and Tie Them Into It.
We service several very high net worth clients. Recently a client came into our office after receiving a very large buyout from the company he sold.
He was worried about how his kids would grow up now that they could literally have anything they wanted.
The options we’ve already discussed appealed to him, but he wanted a way to begin teaching them about living and working with large sums of money now, why they were still young (all were under the age of 18).
What we ended up doing was pretty cool. We created a personal foundation for the family. Part of the responsibility of the foundation is to donate 5% of the foundations balance every year.
Instead of making the decision on where to give the money himself, our client gave his kids responsibility for 1% of the distribution. But, to give it away, they had to research different causes and pick one that appealed to them.
It was a great learning experience for the kids because it showed them first hand how their money could work for them and impact the world.
5. Don’t Give Your Kids Money
Don’t want to give your kids significant sums of money when you’re gone?
Give them something other than money now that will enhance their life and help your estate plan.
We already talked about the ability we all have to gift away $14,000 to as many people as you want each year.
Instead of giving away cash, why not use that money to improve the lives of your kids?
Does your kid have student loans? Help them pay them off (check on any pre-payment penalties for any loan help you give).
Does your kid have a mortgage? Help them pay it off.
Does your kid have a dream of starting a business or doing something experiential? Help make it happen for them.
Your only limit when it comes to keeping your kids from blowing their inheritance is your imagination. And, if your imagination is not helping you, come and talk to us and we’ll explore options.
Your hard work, your financial savvy, and your wealth doesn’t have to be and shouldn’t be squandered by the next generation. A little forward thinking and planning can help ensure your work ethic, values, and reputation survive for generations to come.
P.S. Do you have kids? Have you completed guardianship paperwork? Have you done it correctly? Click here to find out what happens if you don’t do anything: Are you okay with a judge choosing the guardians of your children?
P.P.S. Do you own a business? Do you have a plan so the business, and your family, can survive if something happens to you? If not, click here to learn how simple it is to protect your business and your family from tragedy: 5 Ways to Protect Your Business from Catastrophic Failure.
P.P.P.S. Do you have no kids and think you don’t need an estate plan? Single and think a will is only for married couples. You couldn’t be more wrong. Click here to learn more: 5 reasons estate planning is a must have even if you don’t have kids.
Christopher Small is a Kirkland estate planning attorney who helps people get rich and live forever. He is also the owner of CMS Law Firm LLC. Click here to learn more.